Frequently Asked Questions

The Importance of Rural Hospitals

Why do rural communities need a hospital when most health care services are delivered in outpatient settings?

Although most surgeries and medical procedures do not require an overnight stay in a hospital, patients need to receive the procedures in a hospital, ambulatory surgery center, or physician office that is equipped and staffed to perform such procedures safely. Small rural communities are not large enough to support ambulatory surgery centers or specialty medical practices. Unless there is a local hospital, patients will have to travel a long distance to receive a colonoscopy, minor surgery, cancer treatment, or other medical procedures.

Small communities also can’t support free-standing clinical laboratories or imaging centers, so without a local hospital, residents will have to travel a long distance even for a blood test or an x-ray.

Why not convert rural hospitals to outpatient facilities?

Some patients who come to an emergency room for treatment cannot safely return home the same day. For example, a patient with pneumonia or a serious infection may need intravenous antibiotics and fluids for a day or two before they can safely return home, particularly if they live alone. A patient experiencing chest pain may need to stay in the hospital overnight for observation and testing to determine if they have a serious heart condition. If the local hospital cannot provide inpatient care, such patients would have to be transferred miles away to a hospital that does have inpatient care.

Do we really need so many small rural hospitals?

There are hundreds of rural hospitals because most of the nation consists of small rural communities. More than one-third of the nation’s food supply and a similar share of the nation’s energy production comes from these communities. Farms, ranches, mines, and other rural industries could not operate if their workers cannot obtain adequate health care services. (Read more about the importance of rural hospitals to the rest of the country and see an example of how multiple rural hospitals are needed to provide healthcare services in a large agricultural region.)

Wouldn’t residents of rural communities be better off using larger hospitals in nearby communities?

In most of the communities served by small rural hospitals, the nearest alternative hospital is at least a 30-minute drive away. In serious emergencies, a delay of 30 minutes or more in receiving treatment could result in death or serious disability. (See an example of an isolated rural community served by a small hospital.)

Moreover, one cannot go to another hospital for treatment if that hospital has no beds available. The hospital bed shortages during the coronavirus pandemic demonstrated why it is important to have adequate inpatient capacity in both small and large communities.

Isn’t it more important to improve primary care in rural communities than to keep hospitals open?

The majority of small rural hospitals operate one or more Rural Health Clinics in addition to providing inpatient and outpatient hospital services. In most cases, these clinics are the only source of care for low-income residents of the community, and in many cases, the clinics are the only source of primary care for all residents in the community. If the hospital closed, residents of the community would lose access to primary care services as well as emergency care and other hospital services. (Read more about Rural Health Clinics at small rural hospitals.)

Causes of Financial Losses and Closures

Why are rural hospitals closing?

Most of the closures over the past decade occurred because the hospitals experienced large financial losses for multiple years and no longer had sufficient financial reserves to cover the losses. (Read more about the causes of rural hospital closures.)

Why are rural hospitals losing money?

The primary reason most small rural hospitals are losing money is low payments from private health plans for hospital and clinic services. This includes seniors on Medicare Advantage plans; these health plans often pay small rural hospitals less than either Original Medicare or other private health plans pay. (Read more about the causes of financial losses at small rural hospitals.)

Aren’t most rural hospital patients on Medicare or Medicaid?

No. On average, less than half of the patient services delivered at small rural hospitals are for patients with Original Medicare or Medicaid. Although the vast majority of inpatient admissions are for patients on Medicare or Medicaid, inpatient care represents only a small fraction of a rural hospital’s services. (Read more about the mix of patients at rural hospitals.)

Haven’t studies shown that hospitals make large profits on patients with private insurance?

While most urban hospitals and larger rural hospitals make profits on patients with private health insurance, private health plans pay most small rural hospitals less than what it costs to deliver services to patients. The studies showing that hospitals receive high payments and profits on private insurance are based on data from large hospitals and health systems, not small rural hospitals. (Read more about profits and losses on private-pay patients at larger and smaller hospitals.)

Don’t small rural hospitals also lose a lot of money on uninsured patients?

Yes, small rural hospitals lose money on uninsured patients just like every other hospital does. However, larger hospitals can use the profits they make on privately-insured patients to offset the losses on uninsured patients. Rural hospitals can’t do that because they also lose money on the privately-insured patients.

Are payments from private payers too low or are rural hospital costs too high?

No matter how efficiently a small rural hospital operates, it will lose money if it is paid the same amount for services as larger hospitals receive. This is because of the smaller volume of services relative to the minimum fixed cost of delivering those services. For example, an Emergency Department (ED) in a small rural hospital will need one physician on duty at any given time regardless of whether it has 5,000 or 10,000 visits per year. However, the average cost of a visit to the ED will be twice as high if there are only 5,000 visits than if there are 10,000 visits. As a result, the hospital with 5,000 visits will lose money if it is paid the same amount for a visit as the larger hospital. (Read more about the costs of providing services at small rural hospitals.)

Wouldn’t rural hospitals have smaller losses if they didn’t have to maintain an inpatient unit for so few patients?

In most cases, the revenues generated by inpatient care at a small rural hospital exceed the direct costs of delivering that care, so the hospital would be worse off financially if it closed its inpatient unit. (Read more about the impacts of eliminating inpatient services at a small rural hospital.)

Aren’t Critical Access Hospitals paid based on their actual costs?

Only Medicare and some state Medicaid programs pay Critical Access Hospitals based on the actual costs of delivering services. Private health plans do not pay based on actual costs, so Critical Access Hospitals can and do lose significant amounts of money on services delivered to other patients. Moreover, although Medicare originally paid Critical Access Hospitals 101% of the costs of services delivered to Medicare patients, Congressional sequestration reduced the payments to 99% of costs. This means Critical Access Hospitals also lose money on Medicare patients no matter how efficiently they operate, and there is no profit margin available to offset the losses on services to uninsured patients. (Read more about the problems with cost-based payment for rural hospitals.)

Global Budgets for Rural Hospitals

Would a “global hospital budget” prevent rural hospitals from closing?

Global budget programs have generally been designed to reduce the amount spent on hospital services, not to prevent closure of rural hospitals. Current proposals would set a hospital’s global budget at or below the total amount of payments the hospital received in the past, even if those payments weren’t adequate to cover the cost of delivering services in a small rural community.

A global budget can appear very attractive during a pandemic when a hospital’s volume of services and the associated fee-for-service revenue has decreased significantly. But in years when patients need more services or the costs of attracting and retaining staff increases, the fixed amount of revenue under a global budget could increase hospital losses and accelerate closures. (Read more about the strengths and weaknesses of global budgets.)

Hasn’t the global budget program in Maryland helped rural hospitals?

The only small rural hospital in Maryland closed in 2020 despite operating under the global budget system. (Read more about the small rural hospital in Maryland that closed.) The remaining rural hospitals in Maryland are larger than rural hospitals in other states and have more opportunities to reduce unnecessary services, so they were more likely to benefit from a global budget than smaller hospitals in other states would. (Read more about the complex system used in Maryland to set global budgets and the impacts of the program on hospitals and patients.)

Would the new CMS CHART Model prevent rural hospitals from closing?

Under the Community Health Access and Rural Transformation (CHART) Model created by the Centers for Medicare and Medicaid Services (CMS), hospitals would be paid using a form of global budget. The global budgets would be lower than the revenues the hospitals would otherwise have received, and the budgets would be reduced if the hospitals deliver fewer services. As a result, a hospital participating in the CHART model would likely experience even greater losses than it does today. (Read more about the problems with the CMS CHART Model.)

Doesn’t a global budget give a hospital greater flexibility to deliver new and better services in its community?

A global budget only enables a hospital to deliver a new service if the hospital is able to eliminate or reduce one or more existing services in a way that frees up funds to pay for the new service. This can be feasible for a hospital that currently delivers a lot of unnecessary or avoidable services, such as a hospital with a high rate of readmissions. However, small rural hospitals will generally need to use all of the revenues under the global budget to sustain their existing essential services, so there would be little or no opportunity for them to use the “flexibility” in the global budget to deliver more or different services.

Solutions to Rural Hospital Problems

How would a Patient-Centered Payment System for a hospital differ from a global budget or population-based payment?

Under a Patient-Centered Payment System, a rural hospital would receive a Standby Capacity Payment designed to cover the fixed costs of essential hospital services, such as the Emergency Department, the laboratory, the radiology department, and the inpatient unit. This payment would be similar to a global budget in that the amount of the payment would not vary based on the actual number of services the hospital delivered, and it would be similar to population-based payment (i.e., capitation) in that payers would pay based on the number of their insured members living in the community, not based on how many services those members received.

However, unlike a global budget or population-based payment system, the hospital would also receive Service-Based Fees for each service it delivered. For essential services, the amounts of these fees would be based on the incremental cost of delivering additional services. Service-Based Fees would be much lower than the fees that hospitals are currently paid for those services, because the Standby Capacity Payment would already be covering all or most of the fixed costs of the services. These fees would ensure that if patients need more services, the hospital would receive sufficient additional revenue to cover the added costs of delivering those services, rather than being forced to delay or ration care.

(Read more about how a Patient-Centered Payment System would work.)

Why would a Patient-Centered Payment System be better than fee-for-service payment, population-based payment, or a global budget?

Under fee-for-service payment, a hospital loses money when patients are healthier and need fewer services, because the hospital’s revenues decrease even though the hospital still has to pay for the fixed costs of maintaining capacity to deliver services when needed.

Under a global budget or population-based payment, the hospital loses money when patients need more services, because the hospital receives no additional revenue to cover the extra costs of delivering more services.

Under Patient-Centered Payment, the combination of two separate types of payment — the Standby Capacity Payment and Service-Based Fees — does a better job of matching the hospital’s revenues to its costs when the volume of services increases or decreases.