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New models
Although some rural Alabama hospitals are more financially stable, the vast majority still operate in the red.
About one-fourth of the approximately 1,800 U.S. rural hospitals are vulnerable to closure, Chartis Center for Rural Health research shows. Hospitals in states that didn’t expand Medicaid, like Alabama, are more exposed. The median operating margin of rural hospitals in non-expansion states was negative 0.3% in 2019, compared with 0.8% for hospitals in states that expanded Medicaid.
“We predict a lot of vulnerability in Alabama,” said Michael Topchik, national leader for Chartis. “The critical-access hospital program was protective, but so was Medicaid expansion.”
Alabama has the fewest critical-access hospitals per capita in the country, a Modern Healthcare analysis revealed. It has fewer than 0.1 critical-access hospitals per 100,000 residents. Montana, South Dakota and North Dakota have the most at more than four per capita.
Lawmakers formed the critical-access model in 1997. The Centers for Medicare and Medicaid Services pays hospitals with fewer than 25 beds and at least 35 miles apart from another hospital 101% of their reasonable costs. But the program has had limited success, policy experts said.
“The current CAH model is not efficient and has led to oversupply of bed capacity and suboptimal care quality in many rural areas, without improving rural hospitals’ financial viability,” said Ge Bai, an accounting professor at Johns Hopkins University, noting that about half of rural residents bypassed their local critical-access hospitals to receive care in a more distant hospital. “The Rural Emergency Hospital model has the potential to fundamentally address the low occupancy rates and improve care delivery efficiency in rural areas.”
The 35-mile rule precluded many hospitals from receiving the critical-access designation.
“The reason we didn’t have as many was because the reimbursement for our payer mix didn’t make critical-access hospitals a viable model,” said Danne Howard, deputy director of the Alabama Hospital Association. “We are among the lowest when it comes to reimbursement in the nation, in particular Medicare.”
Alabama was among the bottom ranks for Medicare wage index reimbursement, which pays hospitals based on the hourly wages of their service areas. It disproportionately impacted rural areas where the cost of living was lower.
Congress tweaked the wage index formula to boost pay for markets among the bottom quartile. But that only made a small dent, Howard said, noting that the state didn’t expand Medicaid. Many rural providers have seen their bad debt and charity care climb as a result.
“We are exploring how to bolster rural hospitals, not repurpose them,” Howard said. “Had our rural hospitals not been able to care for who they could during the pandemic, our urban hospitals wouldn’t have been able to take on that volume.”
Congress recently passed a new operating model for rural hospitals, although industry observers warn that it could widen rural America’s access gaps.
Critical-access and rural hospitals with fewer than 50 beds can convert to the new Rural Emergency Hospital status. It aims to buoy rural hospitals with very low inpatient volumes, which averaged around 38% in 2016, according to Modern Healthcare’s research.
They would replace all their inpatient care. Instead, they would offer outpatient services, including around-the-clock emergency care, observation, nursing facility services and ambulances. Starting in 2023, those hospitals would receive a Medicare outpatient rate that is 5% higher than what full-service hospitals receive, in addition to monthly facility payments.
“One of big problems with that program is it doesn’t allow for operation of swing beds,” said Brock Slabach, chief operations officer of the National Rural Health Association. “That has been a valuable program in many rural communities, so hospitals will have to seriously look to see if that would make sense.”
If hospitals can forgo their inpatient beds, the Rural Emergency Hospital model could be viable, said Robert Monroe, general counsel at the healthcare consulting firm Advis.
“You want to find gaps that exist in your locality,” he said. “Then you can turn to local employers to do bundled service plans—there is a scope of creativity that doesn’t have a lot of limit.”
A lot of rural hospitals have the payer mix to qualify for the 340B drug discount program, for instance, experts said, who also noted a widespread need for behavioral health services.
Cutting services has an immediate impact on a hospital’s income. But it’s hard to measure the hit to morale, the loss of the community’s trust and other negative ripple effects over the long term, said Eric Shell, a principal at the consultancy Stroudwater Associates.
“So many rural hospitals don’t lead with the abundance mindset; they’d rather focus on cuts,” he said. “You can’t cut anymore in the state of Alabama.”
Efficiency vs. surge capacity
Excluding the pandemic, many rural hospitals’ occupancy rates remain dangerously low. But COVID-19 illustrated the importance of having surge capacity, industry observers said.
Nearly two-thirds of rural hospitals do not have intensive-care beds, according to data from Chartis. Even if they do have capacity, more than two-thirds of rural residents bypass their local hospital for low-acuity care, research shows.
“A lot of these facilities are one physician retirement away from of not being viable,” said Jeff Goldsmith, president and founder of the healthcare consultancy Health Futures.
About 21 rural hospitals closed over the past two years, according to data from the University of North Carolina. There have been 138 closures since 2010.
Hospitals in non-metro areas, as defined by CMS, only had 1.3 ICU beds per hospital, according to Modern Healthcare’s analysis of Medicare cost reports. There are nearly 21 per hospital on average in metro areas.
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