A recent webinar at Penn Medicine Leonard Davis Institute (LDI) of Health Economics focused on the growing set of challenges facing rural hospitals. One issue the panelists zeroed in on is why the Rural Emergency Hospital designation doesn’t seem to be catching on with rural hospitals. 

Rachel Werner, M.D., Ph.D., executive director of LDI, began the discussion by setting the stage: Rural hospitals are facing a crisis, she said. Since 2005, more than 190 rural hospitals have closed across the United States and many more are in danger of closing because of financial shortfalls, Werne noted. This problem is only getting worse, with a recent report finding that half of rural hospitals lost more money in the past year, up from 43 percent in the previous year. 

Paula Chatterjee, M.D., M.P.H., is an assistant professor of Medicine at the Perelman School of Medicine at Penn and is director of Health Equity Research at LDI. She explained that the Rural Emergency Hospital designation is a relatively new attempt by CMS to try to meet some of the challenges that rural hospitals are facing with respect to providing acute inpatient care. 
The program allows rural hospitals to close down their inpatient operations and maintain a freestanding emergency department and outpatient care services. In exchange for doing that, Medicare provides them with a facility fee and a Medicare outpatient payment add-on for providing those outpatient services. “The program has been highly controversial for a variety of different reasons,” she said. “Its stated purpose and its statutory goals are to basically meet the challenge of providing acute inpatient care when you have low occupancy rates. Whether it does that or whether it achieves that is too early to tell.”

Chatterjee said some people are asking: Why are we continuing to withdraw clinical services from rural areas? Why is that the answer? Why isn’t the answer to give additional support to these facilities to allow those services to thrive, proliferate and serve patients? 

“Another area of uncertainty for hospitals is that they don’t know how the math is going to add up here,” Chatterjee said. “You can power down all of your inpatient services. Yes, that addresses some degree of fixed costs. But whether this facility fee and this outpatient add-on really are going to make up that difference is wildly unclear, and again, varies a ton, depending on payer mix, and occupancy. It is an amount of financial risk that is difficult to accept for a rural hospital that is already operating in a lot of financial volatility from day to day. It’s probably not surprising, given these concerns, that rural hospitals are really not jumping to participate in this program. The last time I checked, a month or two ago, there were fewer than 20 hospitals that had signed up to consider converting to the Rural Emergency Hospital designation.” 

Another panelist, Tony Leys, rural editor and correspondent for KFF Health News, said he thinks it depends on the situation whether the designation is attractive or not. “If you’re a small hospital in a health system with a much bigger hospital down the road, it seems more doable. You could set up a pathway where people could easily go back and forth and you’d have access to their records at your hospital,” he explained, whereas if you’re a very isolated independent hospital, it would be much harder to do. 

Leys noted that during the height of the pandemic, a lot of these hospitals that usually have only one or two inpatients a night all of a sudden had many more. “It might have only lasted for a few weeks or a couple of months, but during those few weeks or a couple of months, their inpatient units suddenly became really important, because the medical centers that they usually transferred patients to were jammed and were begging them to hang on to as many patients as they could,” he said.  “I’ve talked to hospital administrators who said if we close this inpatient unit, and that happens again, what are we going to do? I think part of the hesitation goes to that. I mean, that’s a pretty recent experience that they just went through.”

Harold Miller, M.S., president and CEO of the Center for Healthcare Quality and Payment Reform, said that the Rural Emergency Hospital program is just one an example of of a response to the problem that is built on a myth. “The myth is that the reason why rural hospitals are losing money is because they’re delivering inpatient care. When we looked at this for a number of rural hospitals several years ago, what we found was that what the hospitals were losing money on was their emergency department and their primary care units because those were being underpaid by private insurance plans,” he added. “And, in fact, if you eliminate the inpatient unit, you would actually make the hospital a lot worse off financially than otherwise because a lot of the staff on the inpatient unit are shared with the emergency department.”

The other thing that people don’t understand, Miller added, is that when they talk about the small number of patients on the inpatient unit, they’re talking about acute patients. Many small rural hospitals also have rehabilitation patients and do skilled nursing facility care, and they also do long-term care. 

“When you talk about the hospital being forced to close its inpatient, you’re talking about eliminating inpatient care, rehabilitation care and long-term care in the community, and not actually saving the hospital money, and maybe making it worse off,” he said. “So the program is really based on a false premise, and that’s why there have only been two dozen hospitals sign up for it because it doesn’t actually address the problems.”

Other rural health myths

Miller claimed that there are actually several other myths about rural hospitals. “I think the most problematic myth is that the reason they’re closing has something to do with low payments from Medicare or Medicaid or lack of Medicaid expansion,” he said. “The reality is that it is low payments from private insurance plans that are causing the problem in rural hospitals. Many hospitals are losing significant amounts of money on private insurers. Everybody believes that both large and small hospitals get higher payments from private insurance plans than from Medicare and Medicaid. But the exact opposite is actually true for a lot of small rural hospitals. They get paid less by private insurance plans than Medicare and in some cases even less than Medicaid.”

He said it is also a myth that the vast majority of the patients that rural hospitals serve are Medicare and Medicaid patients. In fact, 40 to 50 percent of the services that rural hospitals deliver go to privately insured patients, Miller said. “So if a rural hospital is being underpaid for half of its patients, it’s not surprising that it’s going to lose money.” 

And it’s not just that private insurance plans are not paying enough, he said. In many cases, they aren’t paying at all. They are denying claims; they’re refusing to even contract with small hospitals because they can, and big hospitals have big staffs that can fight against prior authorization denials and denied claims from health insurance plans. Small rural hospitals don’t have the staff to be able to do that.”

This problem is getting worse, Miller said, because of the expansion of Medicare Advantage, which is run by private insurance companies. Original Medicare pays a critical access hospital based on its costs. Medicare Advantage plans are not required to pay based on costs, he explained. Moreover, Original Medicare pays on time. If a physician orders a service, Medicare Advantage plans are not required to pay when a physician orders a service. They can deny that because of prior authorization requirements, etc. All of that leads to significant losses for a lot of rural hospitals, he said.  

“None of the programs that the federal government has created do anything about this. Medicaid expansion is certainly helpful in terms of reducing the number of uninsured patients but it doesn’t do anything to ensure that the payments for insured patients are enough to be able to cover the cost of those services,” Miller said. “And the other programs CMS has created do nothing to try to ensure that the payments from private insurers are adequate.” 

He stressed that the way to solve the rural hospital closure problem is actually quite simple. “It’s simply a matter of both private and public payers paying adequately to cover the costs of delivering services in rural communities. If we want to have those services, we need to pay for them. The remarkable thing about this is that it actually doesn’t cost very much money to solve it. It would only cost a few billion dollars to eliminate the deficits. That’s about about two-tenths of a percent of what we spend on hospitals.”


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