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Addressing Rural Hospital Closures Through Infrastructure Reform

Rural hospitals are closing at alarming rates. Instead of focusing on short-term reimbursement fixes, the broader rural health care infrastructure needs to be updated to get rural residents the right care at the right time. That could mean transforming some inpatient institutions into stand-alone emergency departments, clinics, or other types of outpatient centers that better meet the health needs of rural communities.

Since January 2010, 107 rural hospitals have closed throughout the United States, and an additional 647 are at risk of folding, making rural health care access an area of concern among policymakers and health officials. While local hospitals are not always the most appropriate source of care, for many communities, their hospital is the only source of care. As hospitals continue to close, rural populations must often travel long distances for health services. Stories of hours-long waits at pop-up clinics for limited, basic care are becoming increasingly common.

Rural hospitals have been struggling due to a variety of factors, starting with demographics. Rural Americans are on average, older, sicker, and more likely to be Medicare or Medicaid beneficiaries than their urban counterparts, making them an expensive population to serve. Moreover, rural hospitals experience financial stress caused by a combination of “one size fits all” Medicare payment policies as well as rural providers’ inability to participate in alternative payment models. Because location, demographics, and other factors are often ignored in the policy design, some industries are not able to make the changes necessary to remain compliant with these policies, and this has proven to be a problem for the health industry in rural areas.

Historically, policymakers have increased funding to address the financial stresses that rural hospitals experience after the implementation of “one-size fits all” policies. Instead of embracing short-term fixes and cash infusions, however, rural hospitals should be allowed and encouraged to make more meaningful adjustments to best serve their communities.

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A History of Rural Hospitals and One-Size Fits All Policies

Originally, hospitals were reimbursed for 100 percent of what they spent on each Medicare patient. After years of rising health care costs, the federal government decided to create a new payment system to cut back on the utilization and spending associated with inpatient hospital services.

In 1983, the federal government created the Inpatient Prospective Payment System (IPPS), which set rates for Medicare hospital discharges based on the patient’s diagnostic-related group. IPPS led to reimbursement decreases to hospitals across the country, but rural health systems felt a larger impact because they saw fewer patients compared to busier, urban hospitals. The combination of reduced Medicare reimbursements and their low volume of patients meant large payment cuts for rural providers.

This change in the Medicare payment system had near-immediate effects on rural hospitals. Between 1985 and 1988, 140 rural hospitals closed due to financial stress. The federal government realized the one size fits all IPPS system would not work for rural hospitals, which led to the creation of a variety of inpatient rural hospital designations—Critical Access Hospitals, Sole Community Hospitals, and Medicare-Dependent Hospitals—that change how Medicare reimburses providers. Each designation must meet certain criteria to earn that type of rural hospital status. To address some of the issues associated with rural health service access, Rural Health Clinics (RHCs) and Federally Qualified Health Centers were created to provide outpatient care.

Rural Provider Designations and Medicare Reimbursement Rates

Rural Inpatient Settings
Designation Medicare Payment System Created By Number in US (2016)
Inpatient Prospective Payment System (IPPS)Reimbursement for each Medicare discharge based on the patient's diagnostic-related group (DRG) IPPS Program added to the Social Security Act in 1983346
(15% of Rural Inpatient Hospitals)
Congress created distinct rural inpatient provider designations following CMS’ creation of the IPPS program in 1983, which caused lower payments to rural hospitals.
Designation Medicare Payment System Created By Number in US (2016)
Critical Access Hospital (CAH) Reimbursement is 101 percent of cost of treating each patient. Balanced Budget Act of 1997 1,242
(55% of Rural Inpatient Hospitals)

Sole Community Hospital (SCH)
IPPS payment plus reimbursement based on a federal or hospital specific rate. Consolidated Omnibus Budget Reconciliation Act of 1985 399
(18% of Rural Inpatient Hospitals)
Medicare-Dependent Hospital (MDH) IPPS payment plus reimbursement based on federal or a blended rate. Omnibus Budget Reconciliation Act of 1989 156
(7% of Rural Inpatient Hospitals)
Designation Medicare Payment System Created By Number in US (2016)
Rural Outpatient Settings
Designation Medicare Payment System Created By Number in US (2016)
Rural Health Clinic (RHC) All inclusive, per visit rate that is updated annually by an inflationary index Rural Health Clinics Act (1977) 4,177
Federally Qualified Health Center (FQHC) Reimbursement based on the FQHC-specific prospective payment system. Omnibus Budget Reconciliation Act of 1990 11,000
(Not all FQHCs are in rural areas)

Although the rural hospital designations improved reimbursement rates, more recent changes to Medicare policies had a negative impact on rural hospitals. As a part of the Budget Control Act of 2011, the federal government included a process called sequestration, a package of automatic spending cuts across defense and domestic spending that required Medicare payments to be cut by 2 percent. In addition, the Middle Class Tax Relief & Job Creation Act of 2012 changed the Medicare Bad Debt payments: previously, hospitals were reimbursed between 70 and 100 percent of costs incurred when Medicare beneficiaries were unable to pay co-payments for their services. Now providers are only reimbursed 65 percent, shifting more of the cost onto hospitals.

The combination of the Medicare Bad Debt program changes and sequestration led to financial distress for many rural hospitals, resulting in the closure of 107 rural hospitals over the last nine years.

Transforming the Rural Health Infrastructure

In the past, increasing Medicare reimbursement rates for rural hospitals was the “cure-all” to keep rural hospitals afloat after broad policy changes to hospital payment systems. Traditionally, the United States health care system was based around inpatient hospital services. The system used a fee for service payment model, which incentivized volume over value.

As the United States continues to move from volume to value-based payment systems, policymakers must look beyond quick fixes and embrace changes that transform the rural health infrastructure. Indeed, inpatient hospital care is no longer necessarily the center of health care; focus has begun to shift to improve outpatient services. As fewer patients seek inpatient care, there is no longer a need for hospitals in every rural community. “Right-sizing” the hospitals that do exist and shifting the focus to outpatient care in rural areas will be a better use of resources to combat hospital closures while ensuring that individuals in those areas have access to the care that they need.

Right-sizing critical access hospitals by transforming them to emergency departments. There is a growing consensus that not every community needs a full-service inpatient hospital. Rural communities are sparsely populated, and more services that providers have traditionally delivered in inpatient facilities are now occurring in outpatient settings. According to a 2016 Medicare Payment Advisory Commission report, 10 percent of critical access hospitals saw two or fewer inpatient discharges per week. However, access to emergency medical services is still important. Allowing these facilities to transform to emergency departments may better address the health needs of rural populations while reducing waste in the rural health care system.

Critical access hospitals are reimbursed by Medicare at a rate of 101 percent of what they spend on each patient. This financial incentive pushes more hospitals to try and obtain this designation even when it may not be the best provider type for their community. Unlike critical access hospitals, emergency departments are not required to meet the same strict requirements and require less administrative costs than a full-service hospital. Ensuring rural hospitals have the flexibility to change their scope of service based on the specific needs of their communities will allow rural providers to function more efficiently.

Shifting the focus from inpatient to outpatient services through the fortification of Rural Health Clinics. Unlike other rural provider types, RHCs focus on primary care. Indeed, primary care services lead to lower long-term health spending and better health outcomes. Currently, RHCs must have a physician medical director, although the United States is experiencing a physician shortage —especially in rural areas. Expanding who may manage these clinics to other non-physician providers would allow more RHCs to open across the United States, increasing access to primary care.

By shifting some facilities to increase the delivery of primary care instead of inpatient care, the rural health system should begin to shift from volume to value along with the rest of the U.S. health care system. Expanding access to such services through strengthening rural health clinics will better meet the health care needs of rural Americans without requiring changes to provider reimbursement.

In conclusion, rural health systems must begin to look to long-term infrastructural changes instead of focusing on short-term fixes by relying on cash infusions to stay afloat. Allowing rural hospitals more flexibility in deciding their scope of practice as well as shifting the overall focus from inpatient to outpatient services will better address the health needs of rural Americans, while making the rural health system more efficient.

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