Health Policy in Crisis: Saving Rural Hospitals Across America

What would happen if you had an accident, and the nearest emergency hospital was more than 30 minutes away? What would you do if you arrived at the hospital, but there were no physicians or hospital beds available?

These are the scenarios that millions of Americans are facing due to the lack of rural hospitals across the United States.

With more hospitals at risk of closure, it is important to evaluate the causes and solutions to overcome this crisis. | Image credit: Kirill Gorlov - stock.adobe.com

In an assessment issued by the US Government Accountability Office (GAO), it was estimated that 20% of the US population, or 60 million Americans, live in rural regions where hospitals are being wiped out, and they generally experience worse health outcomes than urban residents.¹

With more hospitals at risk of closure, it is important to evaluate the causes and solutions to overcome this crisis.

The Backstory of Rural Health Care

America’s rural health safety net has been in crisis for nearly 15 years, according to a report by Chartis published earlier this year.² The report noted an alarming trend, finding that as rural hospitals fall deeper into the red, “care deserts” widen throughout rural communities, and the increasing use of Medicare Advantage could further disrupt rural hospital revenue.

"The fact that 50% of rural hospitals are operating in the red and nearly 420 are vulnerable to closure should serve as an urgent call to accelerate efforts at the state and national levels to reinforce the rural health safety net and ensure access to care for under-resourced and socioeconomically disadvantaged communities,” the report said.

Other key findings of the report include:

• The percentage of America’s rural hospitals operating in the red jumped from 43% to 50% in the 12 months before February 2024.
• Fifty-five percent of independent rural hospitals are operating in the red, while 42% of health system–affiliated rural hospitals are operating at a loss. Nearly 60% of rural hospitals are now affiliated with a health system.
• Medicare Advantage now accounts for 35% of all Medicare-eligible patients in rural communities. In 7 states, Medicare Advantage penetration exceeds 50%.
• Access to inpatient care continued to deteriorate as 167 rural hospitals since 2010 have either closed or converted to a model that excludes inpatient care.
• A total of 418 rural hospitals are vulnerable to closure.
• Between 2011 and 2021, 267 rural hospitals dropped obstetrics services, representing nearly 25% of America’s rural obstetrics units.
• Between 2014 and 2022, 382 rural hospitals stopped providing chemotherapy services.

What’s Causing Financial Problems at Small Rural Hospitals?

Small rural hospitals are forced to close because they are not being paid enough to cover the cost of delivering care to patients in rural areas, whereas urban hospitals and larger rural hospitals are able to make large profits on services to patients with private insurance.³ Many small rural hospitals only remain open because they receive supplemental funding from state grants or local taxes.

Additionally, the COVID-19 pandemic left small rural hospitals experiencing lower margins on patient services, pushing them even further into the red. While larger rural hospitals and urban hospitals also experienced lower margins between 2019 and 2021, most of them continued to gain profits on patient services overall.

Payment Methods in Rural Hospitals

The cost of delivering services such as emergency department visits, inpatient care, laboratory tests, and imaging studies is inherently higher in rural settings than in larger urban hospitals. This discrepancy is due to the fixed costs associated with maintaining a minimum level of staffing and equipment, which are necessary regardless of patient volume. For instance, even if a rural hospital's emergency department sees fewer patients, it still needs to have a physician available 24/7, making the cost per visit higher. Payment rates designed for larger hospitals fail to cover these higher per-service costs in rural hospitals. Furthermore, private health insurers often reimburse rural hospitals at lower rates than their urban counterparts, exacerbating the financial challenges.

Additionally, while critical access hospital (CAH) status offers some relief by providing cost-based payments for traditional Medicare beneficiaries, this does not extend to uninsured patients or those with Medicare Advantage or other private insurance plans. Moreover, CAH status can increase out-of-pocket costs for patients, making health care less affordable for those already facing economic challenges. Furthermore, payment systems that link revenue to service utilization discourage hospitals from implementing preventive health measures, as improving the community's overall health and reducing the need for services directly leads to reduced hospital income, thereby increasing financial losses.

“There’s a number of myths about rural hospitals,” said Harold Miller, MS, president of CEO of the Center for Healthcare Quality and Payment Reform, in a virtual seminar held by Penn Leonard Davis Institute of Health Economics.⁴ “The most problematic of which is the idea that their closing has something to do with low payments from Medicare and Medicaid, or lack of Medicaid expansion. The reality is that it’s low payments from private insurance plans that are causing the problem in rural hospitals. There’s a widely held belief that both large and small hospitals get higher payment from private insurance plans than Medicare and Medicaid. But the exact opposite is true for a lot of small rural hospitals. They get paid less by private insurance plans than Medicare, and, in some cases, even Medicaid.”

Challenges With Proposed Policies for Supporting Rural Hospitals

Several policies have been proposed to support rural hospitals, including converting hospitals to rural emergency hospitals by eliminating inpatient services, implementing global budgets, offering shared savings bonuses for reducing health care spending, and expanding Medicaid eligibility.³ However, these proposals have significant drawbacks that fail to address the underlying challenges facing rural hospitals:

• Requiring rural hospitals to eliminate inpatient services to qualify as rural emergency hospitals may reduce access to care and worsen financial losses.
• Global budget models, designed to cap hospital revenues, do not adjust for unexpected increases in patient needs or rising operational costs, potentially leading to financial losses and reduced service quality.
• Shared savings programs, such as those involving accountable care organizations, are unlikely to benefit small rural hospitals. These hospitals often find it challenging to achieve the minimum savings required to earn bonuses due to limited opportunities for cost reduction.
• Expanding Medicaid eligibility could help reduce losses from uninsured patients, but it does not solve the issue of low reimbursement rates for Medicaid services, which often result in financial losses for rural hospitals.

A Patient-Centered Payment System for Rural Hospitals

A better way to pay rural hospitals includes a patient-centered payment method, with a focus on ensuring availability of essential services in the community, enabling timely delivery of the services patients need, and supporting delivery of appropriate, high-quality, affordable care.

Rural hospitals should receive standby capacity payments in addition to service-based fees for individual services, according to a report by the Center for Healthcare Quality and Payment Reform.⁵ These standby capacity payments would cover the fixed costs of essential services like emergency care, ensuring that hospitals can maintain the necessary infrastructure and staffing to respond to urgent health issues, even when patient numbers are low. Meanwhile, service-based fees would cover the variable costs associated with actual service delivery, aligning financial support with patient care needs. This approach would better support rural hospitals' financial stability, preserving essential health care services for rural communities and improving overall health outcomes.

The Cost of Preserving Rural Hospitals

Ensuring that payments cover the true costs of services in rural communities would only increase national health care spending by a marginal amount of approximately $5 billion per year, or just 0.1% of total national health care expenditure. This modest investment would support primary and emergency care, the areas most impacted by underpayment at rural hospitals. Without such adjustments, closures of these hospitals are likely to lead to higher overall health care costs. When rural residents lose access to local preventive and emergency care, they are more likely to experience worsening health conditions that will require more expensive treatments in the future.

“We need to change the perceptions about these things if we’re going to get to genuine solutions for rural hospitals,” Miller said in the virtual seminar.⁴ “We need to be thinking about a different approach to paying rural hospitals that’s a combination of 2 different kinds of payments. The first is a standby capacity payment from all payers that supports a minimum fixed cost for essential services like an emergency department or an OB-GYN unit. The second is the payment of smaller fees for individual services. That would also then make the care at a small rural hospital more affordable for individuals in the community because they’re not having to pay for all of those fixed costs every time they go and get a test or have a visit there. This combination of standby capacity payments and service fees would be a much better payment system than any of the things that have been tried so far.”

References

1. Accessing health care in rural America. Government Accountability Office. May 16, 2023. Accessed August 27, 2024. https://www.gao.gov/assets/gao-23-106651.pdf

2. Unrelenting pressure pushes rural safety net crisis into uncharted territory. Chartis. February 15, 2024. Accessed August 27, 2024. https://www.chartis.com/sites/default/files/documents/chartis_rural_study_pressure_pushes_rural_safety_net_crisis_into_uncharted_territory_feb_15_2024_fnl.pdf

3. Problems and solutions for rural hospitals – saving rural hospitals. Center for Healthcare Quality and Payment Reform. July 2024. Accessed August 27, 2024. https://ruralhospitals.chqpr.org/Overview.html

4. Levins H. Exploring the policies that are closing rural hospitals. Penn LDI. April 25, 2024. Accessed August 27, 2024. https://ldi.upenn.edu/our-work/research-updates/exploring-the-policies-that-are-closing-rural-hospitals/

5. Rural hospitals at risk of closing. Center for Healthcare Quality and Payment Reform. July 2024. Accessed August 27, 2024. https://ruralhospitals.chqpr.org/downloads/Rural_Hospitals_at_Risk_of_Closing.pdf