Overview of Problems and Solutions (2023)

Saving Rural Hospitals

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  • Overview
  • Details
    • 1. Importance of Rural Hospitals
    • 2. Causes of Financial Problems
    • 3. Cost of Rural Services
    • 4. Cost-Based Payment
    • 5. Global Budgets
    • 6. ACOs and Shared Savings
    • 7. Patient-Centered Payment
    • 8. Saving Rural Hospitals
  • FAQ
  • Data
    • Urban and Rural Hospitals
    • Rural Hospital Status
    • Trend in Margins
    • Payer Mix and Margins
    • Sources of Margins
    • Assets to Cover Losses
    • Prices, Costs, and Payments
    • Methodology
  • Resources
    • Reports
  • About


Overview of Problems and Solutions

Small rural hospitals provide most or all of the health careservices in the communities they serve. Small rural hospitalsdeliver 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-minutedrive from the nearest alternative hospital, and many communities haveno alternate sources of health care.

The services provided by small rural hospitals are alsoimportant for residents of urban areas. Most of the nation’sfood supply and energy production comes from rural communities. Farms,ranches, mines, drilling sites, wind farms, and solar energy facilitiescannot function without an adequate, healthy workforce, and people areless likely to live or work in rural communities that do not have anemergency department and other healthcare services. Many popularrecreation, historical, and tourist sites are located in rural areas,and visitors to those sites need access to emergency services if theyhave an accident or medical emergency.

Small rural hospitals are struggling to survive. Themajority of small rural hospitals are losing money delivering patientservices. More than 130 rural hospitals have closed in the past decade,and most of these were small rural hospitals. In most cases, the closureof the hospital resulted in the loss of both the emergency departmentand other outpatient services, and residents of the community must nowtravel much farther when they have an emergency or need other healthcareservices. This increases the risk of death or disability when accidentsor serious medical conditions occur, but it also increases the risk ofhealth problems going undiagnosed or inadequately treated due to lack ofaccess to care.

More than 600 rural hospitals — over 30% of all ruralhospitals in the country — are at risk of closing in the nearfuture. Most of these are small rural hospitals that providenot only emergency care, inpatient care, and outpatient services, butalso primary care, rehabilitation, and long-term care services for theircommunities. Moreover, most of the hospitals are located in isolatedcommunities where loss of the hospital could severely limit access tohealth care services. Millions of people could be directly harmed ifthese hospitals close, and people in all parts of the country could beaffected through the impacts on workers in agriculture and otherindustries.

Rural Hospitals at Risk of Closure

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Risk of closure is defined as persistent financial losses on patientservices and insufficient financial reserves to allow continuedoperation unless the hospital receives large grants, local taxes, orother revenues not derived from services to patients.

The smallest rural hospitals are facing closure because thepayments they receive for services are less than the cost of deliveringcare to patients in rural communities. Most of the smallestrural hospitals lose significant amounts of money delivering patientservices, while the majority of larger rural hospitals make profitsdelivering services to patients.

Median Margins on Patient Services
at Rural Hospitals by Size ofHospital

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Amounts shown are the median profits or losses on patient servicesfor the most recent three years available (excluding 2020) at ruralhospitals in each size category.

Most of the smallest rural hospitals in the country losemoney delivering services to patients. In almost every state,the majority of very small rural hospitals (those with less than $20million in annual expenses) do not receive payments that are high enoughto cover the cost of delivering services to patients.

Patient Service Margin at Small Rural Hospitals

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Amounts shown are the median profits or losses on patient servicesfor the most recent three years available (except 2020) at ruralhospitals with less than $20 million in total expenses.

The largest causes of losses at the smallest rural hospitalsare low payments by private health insurance plans and patient baddebt. Private insurance plans pay small hospitals less than itcosts to deliver essential services such as emergency care and primarycare, whereas the payments from private plans to most large hospitalsare significantly higher than the costs of delivering services. Althoughthe majority of very small hospitals also lose money on Medicaid andcharity care patients, losses or low payments on patients with privateinsurance (including Medicare Advantage) plans have a bigger impact onthe hospitals’ total margins because there are far more patients whohave private insurance. The smallest rural hospitals also lose asignificant amount on bad debt, i.e., insured patients who cannot payrequired amounts of cost-sharing and patients who cannot affordinsurance but do not qualify for charity care. Large hospitals canoffset bad debt losses using the profits they make on patients withprivate insurance, but most small rural hospitals cannot do that becausethey don’t make profits on private-pay patients. Medicare payments arenot the biggest problem because most small rural hospitals areclassified as Critical Access Hospitals and receive cost-based paymentsfrom Medicare.

Payer Contributions to Margins
at the Smallest RuralHospitals

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Amount shown for each payer is how much the hospital’s overall marginon patient services increased or decreased due to profits or losses onservices to patients insured by that payer. Amounts are the medians ofthe most recent 3 years available (except for 2020) for rural hospitalswith less than $20 million in total expenses.

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

Margin on Private Payer Patients

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Amount shown is the median profit or loss on services to patientswith private insurance during the most recent three years available(except for 2020) at rural hospitals with less than $20 million in totalexpenses located in each state.

Margin on Medicaid Patients

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Amount shown is the median profit or loss on services to patients onMedicaid during the most recent three years available (except for 2020)at rural hospitals with less than $20 million in total expenses locatedin each state.

Many small rural hospitals remain open only because theyreceive significant supplemental funding from state grants or localtaxes. In some states, state governments provide grants thatreduce or eliminate losses at small rural hospitals, while there islittle or no such assistance in other states. Some small rural hospitalsare organized as public hospital districts, and residents of thesecommunities tax themselves to offset underpayments by private healthplans and Medicaid. It is not clear that these hospitals can continuereceiving these large amounts of revenue in the future, and withoutthem, the hospitals would likely be forced to close.

Proportion of Total Margin Due to Other Income

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Amount shown is the median for the most recent three years available(except for 2020) for rural hospitals with less than $20 million intotal expenses located in each state.

Most rural hospitals experienced lower margins on patient servicesduring the pandemic. This was most problematic for small ruralhospitals. The majority of small rural hospitals were losing money onpatient services prior to the pandemic, so the pandemic pushed them evenfurther into the red. In contrast, even though larger rural hospitalsand urban hospitals also experienced lower margins, most of themcontinued to generate profits on patient services overall.

Change in Patient Service Margins During the Pandemic

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“Rural < $30M” are hospitals with less than $30 million in totalannual expenses. 2020 is the hospital’s fiscal year that included theMarch-June 2020 period, and 2019 is the preceding year.

The primary reason patient service margins at rural hospitalsdecreased during the pandemic was higher losses on patients insured byprivate health plans (including Medicare Advantage plans). WhileMedicare payments to rural hospitals increased during thepandemic, private health insurance plans paid a smallerpercentage of rural hospitals’ charges and costs.

Change in Percentage of Charges Paid, 2019-2020

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“Medicare” includes only Original Medicare. Medicare Advantage plansare included with “Private” payers. The change shown is the differencebetween the fiscal year that included the March-June 2020 period and thepreceding fiscal year.

The losses on patients insured by private health plans hurt thesmallest rural hospitals the most because they were already receivinglow payments from private payers prior to the pandemic. Althoughhospitals of all sizes experienced lower margins during the pandemic onpatients who had insurance from private companies, the reductions meantthat most small rural hospitals lost money providing services to thesepatients.

Rural hospitals received significant amounts of federal aid duringthe pandemic that enabled them to continue operating despite losingmoney delivering services to patients. However, this federal assistancewas only temporary, while the losses on patient services will likelycontinue or worsen because of the higher costs that rural hospitals arenow facing.

Standard payments for hospital services are not large enoughto cover the higher cost of delivering services in small ruralcommunities. The average cost of an emergency room visit,inpatient day, laboratory test, imaging study, and primary care visit isinherently higher in small rural hospitals and clinics than at largerhospitals because there is a minimum level of staffing and equipmentrequired to deliver each of these services regardless of how manypatients need to use them. For example, a hospital Emergency Departmenthas to have at least one physician available around the clock in orderto respond to injuries and medical emergencies quickly and effectively,regardless of how many patients actually visit the ED. A smallercommunity will have fewer ED visits, but the cost of the ED will be thesame, so the average cost per visit will be higher. Consequently, feesthat are high enough to cover the average cost per service at largerhospitals will fail to cover the costs of the same services at smallhospitals. Many private health plans pay small rural hospitalsless than they pay larger hospitals for the same services, eventhough the cost per service at the smaller hospitals is inherentlyhigher.

Critical Access Hospital status reduces the hospital’s lossesonly on services to Original Medicare beneficiaries, and it makesservices less affordable for the patients. Most small ruralhospitals are classified as Critical Access Hospitals, which enablesthem to receive cost-based payment for patients with Original Medicareand some Medicaid programs. Although this results in higher payments forMedicare patients than the hospital would receive otherwise, it doesnothing to reduce losses on uninsured patients and those with othertypes of insurance. Moreover, Medicare rules require patients to payhigher cost-sharing amounts in order to receive services at CriticalAccess Hospitals than at other hospitals, so the higher payments for thehospital can harm its patients.

Current methods of payment penalize hospitals for efforts toimprove the health of rural residents. If community residentsare healthier and need fewer ED visits and other services, thehospital’s revenues will decrease, but the cost of maintaining theessential services will not change, thereby increasing financial lossesat the hospital. The same problem occurs under Medicare’s cost-basedpayment system for Critical Access Hospitals and Rural Health Clinicsbecause Medicare’s share of the hospital’s costs decreases if Medicarebeneficiaries need fewer services.

Four policies are commonly proposed to help rural hospitals are: (1)converting hospitals to “Rural Emergency Hospitals” by eliminatinginpatient services; (2) creating a “global budget” for the hospital; (3)paying a hospital “shared savings” bonuses if it reduces totalhealthcare spending for its patients; and (4) expanding Medicaideligibility. None of these proposals will solve the problems facingrural hospitals.

Requiring rural hospitals to eliminate inpatient serviceswould increase their financial losses while reducing access to inpatientcare for local residents. Beginning in 2023, hospitals withfewer than 50 beds will be allowed to convert to “Rural EmergencyHospital” status by eliminating their inpatient services. In most cases,the revenues generated by inpatient care at a small rural hospitalexceed the direct costs of delivering that care, so even thougheliminating the inpatient unit would reduce the hospital’s costs, itsrevenues would decrease even more, making it worse off financially.Higher Medicare payments for outpatient services at these hospitals mayor may not be sufficient to offset these losses. Moreover, residents whohave a medical condition that requires a short hospital admission wouldhave to be transferred to another city, and local residents whocurrently receive inpatient rehabilitation and/or long-term nursing carein the hospital’s swing beds could no longer receive those servicesclose to home.

Impacts of Elimination of Inpatient Services

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Amounts shown are medians for the most recent three years availablebased on estimated reduction in costs and revenues for inpatient care atrural hospitals.

Giving the hospital a global budget would increase losseswhen patients need more services or the hospital’s costsincrease. Most global budget programs have been created inorder to limit or reduce payments to hospitals, not to addressshortfalls in payment or prevent closure of small rural hospitals.Although hospitals in communities that are experiencing significantpopulation losses or that deliver unnecessary services could benefitfrom a global budget program in the short run, hospitals that experiencehigher costs or higher volumes of services due to circumstances beyondtheir control would likely be harmed, since their revenues would nolonger increase to help cover the additional costs.

  • Although Maryland’s global budget program has been cited as anexample of how rural hospitals can benefit from this approach, thesmallest rural hospital in Maryland closed in 2020 despite operatingunder the global budget system.

  • Under the Pennsylvania Rural Health Model that was created byCMS, hospitals receive global budgets that are based on the amount ofrevenues they received in the past, with no assurance the budgets willbe adequate to support the current cost of delivering essentialservices.

  • Under the CMS Community Health Access and Rural Transformation(CHART) Model, the “capitated payments” to rural hospitals would bereduced below the inadequate amounts they currently receive in order toreduce for Medicare spending.

Access to care for patients can be harmed if budgets are not largeenough to support the costs of services, which has led many othercountries 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 ondownside risk for total healthcare spending. Most small ruralhospitals are unlikely to benefit from forming an Accountable CareOrganization (ACO) in order to participate in shared savings programs.The majority of ACOs in the Medicare Shared Savings Program have beenunable to qualify for shared savings bonuses, and it is particularlydifficult for small rural ACOs to do so because the minimum savingsthreshold is higher and there are fewer opportunities to generatesavings. “Downside risk” is especially problematic for small ruralhospitals, because they do not deliver and cannot control many of themost expensive services their residents may need, and a requirement thatthe rural hospital pay penalties when community residents need expensiveservices at urban hospitals would worsen the rural hospitals’ financialproblems.

Expansion of eligibility for Medicaid would reduce hospitals’losses on uninsured patients and bad debt, but it will not reduce thelosses on services delivered to Medicaid patients due to low paymentamounts. In states that have expanded Medicaid, losses onuninsured charity cases and bad debt decreased, but losses on servicesto Medicaid patients nearly doubled, resulting in relatively little netbenefit for the small hospitals. Health insurance is only of limitedvalue to an individual if there is no hospital or primary care clinic intheir community where they can use that insurance.

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

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

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

  1. Ensure availability of essential services in thecommunity;

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

  3. Encourage better health and lower healthcare spending.

A Patient-Centered Payment System for rural hospitals andprimary care clinics can achieve all three goals using the followingfive components:

Patient-Centered Payments

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  • Standby Capacity Payments tosupport the fixed costs of essential services. Each healthinsurance plan (Medicare, Medicaid, Medicare Advantage, and commercialinsurance) should pay a Standby Capacity Payment to the rural hospitalbased on the number of members of that plan who live in the community(regardless of the number of services the patients receive). Thisensures that the hospital has adequate revenues to support the minimumstandby costs of essential services such as the emergency department,inpatient unit, and laboratory.

  • Service-Based Fees fordiagnostic and treatment services based on the marginal costs of eachservice. Rural hospitals would continue to receive payment fromhealth plans for delivering individual services, but the Service-BasedFees will be much lower than current payments. Since the hospital wouldreceive Standby Capacity Payments to support the fixed costs ofessential services, the Service-Based Fees would only need to cover thesmall amount of additional costs incurred when additional services aredelivered. This means that if patients stay healthy and need fewerservices, the hospital’s revenues and costs will decrease by similaramounts, and the hospital’s margin will not be harmed.

  • Patient-Centered Primary Care Paymentfor primary care. Rural Health Clinics and primary carepractices in the community should receive monthly Wellness Care Paymentsand Chronic Condition Management Payments to support proactivepreventive care and chronic disease care delivered by primary careteams, rather than being paid only for office visits withphysicians/clinicians. The payments should provide the clinic/practicewith adequate resources and flexibility to help patients stay as healthyas possible and to deliver timely, evidence-based care when the patientsexperience health problems. (More information about Patient-Centered Payment for primary care and otherservices is available at www.patientcenteredpayment.org.)

  • Accountability for quality andspending. In return for receiving adequate, predictable,flexible payments to support essential services, rural hospitals andprimary care clinics would take accountability for deliveringappropriate evidence-based services in a high-quality manner.

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

A Patient-Centered Payment System structured in this waywould provide adequate funding to support the costs of essentialservices in small rural communities, without the kinds of problematicincentives to deliver unnecessary services or to stint on care thatexist in other payment systems.

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

Cost of Eliminating Rural HospitalDeficits
Compared to National Healthcare Spending

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

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Spending would likely increase even if the hospitalsclose. The reduced access to preventive care and prompttreatment resulting from a rural hospital closure will cause residentsof the community to need even more services in the future. Paying morenow to preserve local healthcare services is a better way to investresources.

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

  • Businesses, state and local governments, and ruralresidents must demand that private health insurance companies change theway they pay small rural hospitals. The biggest cause ofnegative margins in most small rural hospitals in most states is lowpayments from private insurance plans and Medicare Advantage plans.Private insurance plans are unlikely to increase or change theirpayments unless businesses, state and local governments, and residentschoose health plans based on whether they pay the local hospitaladequately and appropriately.

  • State Medicaid programs and managed care organizationsneed to pay small rural hospitals adequately and appropriately for theirservices. Expanded eligibility for Medicaid will help morerural residents afford healthcare services, but small rural hospitalscannot deliver the services if Medicaid payments are too low. CMS shouldauthorize states to require Medicaid MCOs to use Patient-CenteredPayments and to pay adequately for services at small ruralhospitals.

  • Congress should create a Patient-Centered Payment programin Medicare for small rural hospitals. Although Medicare is notthe primary cause of deficits at small rural hospitals, Medicare needsto pay rural hospitals and clinics in a way that will better sustainservices in the long run.

Rural hospitals need to be transparent about their costs,efficiency, and quality, and they should do what they can to controlhealthcare spending for local residents. In order to supporthigher and better payments for hospitals, purchasers and patients inrural communities need to have confidence that the hospitals will usethe payments to deliver high-quality services at the lowest possiblecost, and that the hospitals will proactively identify and pursueopportunities to control healthcare costs for community residents. Smallrural hospitals should estimate the minimum feasible costs fordelivering essential services using an objective methodology, theyshould proactively work to improve the efficiency of their services, andthey should publicly report on the quality of their care.

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