Overview of Problems and Solutions

The Importance of Rural Hospitals

Small rural hospitals provide most or all of the health care services in the communities they serve. Small rural hospitals deliver not only traditional hospital services such as emergency care, inpatient care, and laboratory testing, but also rehabilitation, long-term care, maternity care, home health care, and even primary care. The majority of the communities they serve are at least a 25-minute drive from the nearest alternative hospital, and many communities have no alternate sources of health care.

The services provided by small rural hospitals are also important for residents of urban areas. Most of the nation’s food supply and energy production comes from rural communities. Farms, ranches, mines, drilling sites, wind farms, and solar energy facilities cannot function without an adequate, healthy workforce, and people are less likely to live or work in rural communities that do not have an emergency department and other healthcare services. Many popular recreation, historical, and tourist sites are located in rural areas, and visitors to those sites need access to emergency services if they have an accident or medical emergency.

The Crisis Facing Rural Healthcare

Small rural hospitals are struggling to survive. The majority of small rural hospitals are losing money delivering patient services. More than 130 rural hospitals have closed in the past decade, and most of these were small rural hospitals. In most cases, the closure of the hospital resulted in the loss of both the emergency department and other outpatient services, and residents of the community must now travel much farther when they have an emergency or need other healthcare services.  This increases the risk of death or disability when accidents or serious medical conditions occur, but it also increases the risk of health problems going undiagnosed or inadequately treated due to lack of access to care.

More than 800 rural hospitals — 40% of all rural hospitals in the country —- are at risk of closing in the near future. Most of these are small rural hospitals that provide not only emergency care, inpatient care, and outpatient services, but also primary care, rehabilitation, and long-term care services for their communities. Moreover, most of the hospitals are located in isolated communities where loss of the hospital could severely limit access to health care services. More than 30 million people could be directly harmed if these hospitals close, and people in all parts of the country could be affected through the impacts on workers in agriculture and other industries.

Rural Hospitals at Immediate or High Risk of Closure

Rural Hospitals at Immediate or High Risk of Closure

Immediate risk of closure is defined as persistent financial losses and insufficient financial reserves to allow continued operation. High risk of closure means the hospital has had persistent losses on patient services and has only been able to maintain positive margins through significant revenues from grants, local taxes, or other revenues not derived from services to patients.

The Causes of the Financial Problems at Small Rural Hospitals

The smallest rural hospitals are facing closure because the payments they receive for services are less than the cost of delivering care to patients in rural communities. Most of the smallest rural hospitals lose significant amounts of money delivering patient services, while the majority of larger rural hospitals make profits delivering services to patients.

Median Margins on Patient Services
at Rural Hospitals by Size of Hospital

Median Margins on Patient Services

Amounts shown are the median profits or losses on patient services for the most recent three years available at rural hospitals in each size category.

Most of the smallest rural hospitals in the country lose money delivering services to patients. In almost every state, the majority of very small rural hospitals do not receive payments that are high enough to cover the cost of delivering services to patients.

Patient Service Margin at Small Rural Hospitals

Patient Service Margin

Amounts shown are the median profits or losses on patient services for the most recent three years available at rural hospitals with less than $20 million in total expenses.

The largest causes of losses at the smallest rural hospitals are low payments by private health insurance plans and patient bad debt. Private insurance plans pay small hospitals less than it costs to deliver essential services such as emergency care and primary care, whereas the payments from private plans to most large hospitals are significantly higher than the costs of delivering services. Although the majority of very small hospitals also lose money on Medicaid and charity care patients, losses or low payments on patients with private insurance (including Medicare Advantage) plans have a bigger impact on the hospitals’ total margins because there are far more patients who have private insurance. The smallest rural hospitals also lose a significant amount on bad debt, i.e., insured patients who cannot pay required amounts of cost-sharing and patients who cannot afford insurance but do not qualify for charity care. Large hospitals can offset bad debt losses using the profits they make on patients with private insurance, but most small rural hospitals cannot do that because they don’t make profits on private-pay patients. Medicare payments are not the biggest problem because most small rural hospitals are classified as Critical Access Hospitals and receive cost-based payments from Medicare.

Payer Contributions to Margins
at the Smallest Rural Hospitals

Payer Contributions to Margins at the Smallest Rural Hospitals

Amount shown for each payer is how much the hospital’s overall margin on patient services increased or decreased due to profits or losses on services to patients insured by that payer. Amounts are the medians of the most recent 3 years available for rural hospitals with less than $20 million in total expenses.

There is tremendous variation across the country in both the magnitude of losses and the causes of losses at very small rural hospitals. In many states, low payments from private insurance plans are the primary cause of financial problems in small rural hospitals, but in other states, low Medicaid payments and low rates of insurance coverage are the largest causes of losses.

Margin on Private Payer Patients

Margin on Private Payer Patients

Amount shown is the median profit or loss on services to patients with private insurance during the most recent three years available at rural hospitals with less than $20 million in total expenses located in each state.

Margin on Medicaid Patients

Margin on Medicaid Patients

Amount shown is the median profit or loss on services to patients on Medicaid during the most recent three years available at rural hospitals with less than $20 million in total expenses located in each state.

Many small rural hospitals remain open only because they receive significant supplemental funding from state grants or local taxes. In some states, state governments provide grants that reduce or eliminate losses at small rural hospitals, while there is little or no such assistance in other states. Some small rural hospitals are organized as public hospital districts, and residents of these communities tax themselves to offset underpayments by private health plans and Medicaid. It is not clear that these hospitals can continue receiving these large amounts of revenue in the future, and without them, the hospitals would likely be forced to close.

Proportion of Total Margin Due to Other Income

Proportion of Total Margin Due to Other Income

Amount shown is the median for the most recent three years available.

The Problems With Current Payment Methods

Standard payments for hospital services are not large enough to cover the higher cost of delivering services in small rural communities. The average cost of an emergency room visit, inpatient day, laboratory test, imaging study, and primary care visit is inherently higher in small rural hospitals and clinics than at larger hospitals because there is a minimum level of staffing and equipment required to deliver each of these services regardless of how many patients need to use them. For example, a hospital Emergency Department has to have at least one physician available around the clock in order to respond to injuries and medical emergencies quickly and effectively, regardless of how many patients actually visit the ED. A smaller community will have fewer ED visits, but the cost of the ED will be the same, so the average cost per visit will be higher. Consequently, fees that are high enough to cover the average cost per service at larger hospitals will fail to cover the costs of the same services at small hospitals. Many private health plans pay small rural hospitals less than they pay larger hospitals for the same services, even though the cost per service at the smaller hospitals is inherently higher.

Critical Access Hospital status reduces the hospital’s losses only on services to Original Medicare beneficiaries, and it makes services less affordable for the patients. Most small rural hospitals are classified as Critical Access Hospitals, which enabled them to receive cost-based payment for patients with Original Medicare and some Medicaid programs. Although this results in higher payments for Medicare patients than the hospital would receive otherwise, it does nothing to reduce losses on uninsured patients and those with other types of insurance. Moreover, Medicare rules require patients to pay higher cost-sharing amounts in order to receive services at Critical Access Hospitals than at other hospitals, so the higher payments for the hospital can harm its patients.

Current methods of payment penalize hospitals for efforts to improve the health of rural residents. If community residents are healthier and need fewer ED visits and other services, the hospital’s revenues will decrease, but the cost of maintaining the essential services will not change, thereby increasing financial losses at the hospital. The same problem occurs under Medicare’s cost-based payment system for Critical Access Hospitals and Rural Health Clinics because Medicare’s share of the hospital’s costs decreases if Medicare beneficiaries need fewer services.

The Serious Problems With Commonly Proposed Solutions

Four policies are commonly proposed to help rural hospitals are: (1) paying a rural hospital more if it eliminates inpatient services; (2) creating a “global budget” for the hospital; (3) paying a hospital “shared savings” bonuses if it reduces total healthcare spending for its patients; and (4) expanding Medicaid eligibility. None of these proposals will solve the problems facing rural hospitals.

Requiring rural hospitals to eliminate inpatient services would increase their financial losses while reducing access to inpatient care for local residents. In most cases, the revenues generated by inpatient care at a small rural hospital exceed the direct costs of delivering that care, so even though eliminating the inpatient unit would reduce the hospital’s costs, its revenues would decrease even more, making it worse off financially. Moreover, residents who have a medical condition that requires a short hospital admission would have to be transferred to another city, and local residents who currently receive inpatient rehabilitation and/or long-term nursing care in the hospital’s swing beds could no longer receive those services close to home.

Impacts of Elimination of Inpatient Services

Impacts of Elimination of Inpatient Services

Amounts shown are medians for the most recent three years available based on estimated reduction in costs and revenues for inpatient care at rural hospitals.

Giving the hospital a global budget would increase losses when patients need more services or the hospital’s costs increase. Most global budget programs have been created in order to limit or reduce payments to hospitals, not to address shortfalls in payment or prevent closure of small rural hospitals. Although hospitals in communities that are experiencing significant population losses or that deliver unnecessary services could benefit from a global budget program in the short run, hospitals that experience higher costs or higher volumes of services due to circumstances beyond their control would likely be harmed, since their revenues would no longer increase to help cover the additional costs.

  • Although Maryland’s global budget program has been cited as an example of how rural hospitals can benefit from this approach, the smallest rural hospital in Maryland closed in 2020 despite operating under the global budget system.

  • Under the Pennsylvania Rural Health Model that was created by CMS, hospitals receive global budgets that are based on the amount of revenues they received in the past, with no assurance the budgets will be adequate to support the current cost of delivering essential services.

  • Under the Community Health Access and Rural Transformation (CHART) Model announced by CMS in August 2020, the “capitated payments” to rural hospitals would be reduced below the inadequate amounts they currently receive in order to reduce for Medicare spending.

Access to care for patients can be harmed if budgets are not large enough to support the costs of services, which has led many other countries to modify or replace their global budget systems.

Small rural hospitals would be unlikely to benefit from “shared savings” programs, and most would be harmed by taking on downside risk for total healthcare spending. Most small rural hospitals are unlikely to benefit from forming an Accountable Care Organization (ACO) in order to participate in shared savings programs. The majority of ACOs in the Medicare Shared Savings Program have been unable to qualify for shared savings bonuses, and it is particularly difficult for small rural ACOs to do so because the minimum savings threshold is higher and there are fewer opportunities to generate savings. “Downside risk” is especially problematic for small rural hospitals, because they do not deliver and cannot control many of the most expensive services their residents may need, and a requirement that the rural hospital pay penalties when community residents need expensive services at urban hospitals would worsen the rural hospitals’ financial problems.

Expansion of eligibility for Medicaid would reduce hospitals’ losses on uninsured patients and bad debt, but it will not reduce the losses on services delivered to Medicaid patients due to low payment amounts. In states that have expanded Medicaid, losses on uninsured charity cases and bad debt decreased, but losses on services to Medicaid patients nearly doubled, resulting in relatively little net benefit for the small hospitals.

Contributions to Total Margin
by Medicaid, Uninsured, and Bad Debt
in States That Expanded Medicaid

Median for rural hospitals <$20M total expenses. 2012 is pre-expansion, 2018 is post-expansion.

A Better Way to Pay Rural Hospitals and Clinics

A good payment system for rural hospitals and clinics must achieve three key goals:

  1. Ensure availability of essential services in the community;

  2. Enable safe and timely delivery of the services patients need at prices they can afford; and

  3. Encourage better health and lower healthcare spending.

A Patient-Centered Payment System for rural hospitals and primary care clinics can achieve all three goals using the following five components:

Patient-Centered Payments

Patient Centered Payments

  • Standby Capacity Payments to support the fixed costs of essential services. Each health insurance plan (Medicare, Medicaid, Medicare Advantage, and commercial insurance) should pay a Standby Capacity Payment to the rural hospital based on the number of members of that plan who live in the community (regardless of the number of services the patients receive). This ensures that the hospital has adequate revenues to support the minimum standby costs of essential services such as the emergency department, inpatient unit, and laboratory.

  • Service-Based Fees for diagnostic and treatment services based on the marginal costs of each service. Rural hospitals would continue to receive payment from health plans for delivering individual services, but the Service-Based Fees will be much lower than current payments. Since the hospital would receive Standby Capacity Payments to support the fixed costs of essential services, the Service-Based Fees would only need to cover the small amount of additional costs incurred when additional services are delivered. This means that if patients stay healthy and need fewer services, the hospital’s revenues and costs will decrease by similar amounts, and the hospital’s margin will not be harmed.

  • Patient-Based Payments for primary care management. A Rural Health Clinic or primary care practice in a small rural community should receive a monthly Comprehensive Primary Care Management Payment from a patient’s health insurance plan if the patient enrolls with the clinic for ongoing primary care. This payment would give the clinic the flexibility to deliver services in ways that work most effectively for patients, rather than forcing the clinic to deliver only in-person visits at the clinic because payments are limited to those visits. The Comprehensive Primary Care Management Payments would be higher for patients who have higher needs to ensure they can receive high-quality care.

  • Accountability for quality and spending. In return for receiving adequate, predictable, flexible payments to support essential services, rural hospitals and primary care clinics would take accountability for delivering high-quality services and improving patient outcomes. Standards and measures of quality would be used that are appropriate for small rural hospitals and clinics.

  • Value-based cost-sharing for patients. Instead of the high deductibles, co-payments, and co-insurance used in most health insurance plans today, rural hospitals and primary care clinics should have the flexibility to set lower cost-sharing rates for high-value services and to help pay for transportation or provide other assistance that would help patients to adhere to their care plans.

A Patient-Centered Payment System structured in this way would provide adequate funding to support the costs of essential services in small rural communities, without the kinds of problematic incentives to deliver unnecessary services or to stint on care that exist in other payment systems.

How to Save Rural Hospitals and Strengthen Rural Healthcare

It will only cost about $3.3 billion per year to prevent closures of the at-risk hospitals and preserve access to rural healthcare services, an increase of only 1/10 of 1% in total national healthcare spending. No payment system will sustain rural hospitals and clinics unless the amounts of payment are large enough to cover the cost of delivering high-quality care in small rural communities. Because current payments are below the costs of delivering services, an increase in spending will be needed to keep rural hospitals solvent, but $3.3 billion is a tiny amount in comparison to the more than $3 trillion currently spent on healthcare and the more than $1 trillion spent on all hospital services. Moreover, most of the increase in spending will support primary care and emergency care, since these are the services where the biggest shortfalls in current payments exist.

Cost of Eliminating Rural Hospital Deficits
Compared to National Healthcare Spending

Cost of Eliminating Rural Hospital Deficits

Spending Could Increase Even More
If Rural Hospitals Are Allowed to Close

Spending would likely increase even if the hospitals close. The reduced access to preventive care and prompt treatment resulting from a rural hospital closure will cause residents of the community to need even more services in the future. Paying more now to preserve local healthcare services is a better way to invest resources.

Citizens, businesses, local governments, state government, and the federal government must all take action to ensure that every payer provides adequate and appropriate payments for small rural hospitals and clinics:

  • Businesses, state and local governments, and rural residents must demand that private health insurance companies change the way they pay small rural hospitals. The biggest cause of negative margins in most small rural hospitals in most states is low payments from private insurance plans and Medicare Advantage plans. Private insurance plans are unlikely to increase or change their payments unless businesses, state and local governments, and residents choose health plans based on whether they pay the local hospital adequately and appropriately.

  • State Medicaid programs and managed care organizations need to pay small rural hospitals adequately and appropriately for their services. Expanded eligibility for Medicaid will help more rural residents afford healthcare services, but small rural hospitals cannot deliver the services if Medicaid payments are too low. CMS should authorize states to require Medicaid MCOs to use Patient-Centered Payments and to pay adequately for services at small rural hospitals.

  • Congress should create a Patient-Centered Payment program in Medicare for small rural hospitals. Although Medicare is not the primary cause of deficits at small rural hospitals, Medicare needs to pay rural hospitals and clinics in a way that will better sustain services in the long run.

Rural hospitals need to be transparent about their costs, efficiency, and quality, and they should do what they can to control healthcare spending for local residents. In order to support higher and better payments for hospitals, purchasers and patients in rural communities need to have confidence that the hospitals will use the payments to deliver high-quality services at the lowest possible cost, and that the hospitals will proactively identify and pursue opportunities to control healthcare costs for community residents. Small rural hospitals should estimate the minimum feasible costs for delivering essential services using an objective methodology, they should proactively work to improve the efficiency of their services, and they should publicly report on the quality of their care.