Economics of small town clinics and hospitals

We have a hospital

People in rural communities often identify strongly with the institutions in their communities. When asked to discuss their towns, their responses are often a proud litany of the institutions maintained locally: “We have a K-12 school. We have a courthouse, an implement dealer, a car dealer. We have a clinic and we have a hospital.”

According to Brad Gibbens, M.P.A., Associate Director of the University of North Dakota Center for Rural Health, UND School of Medicine and Health Sciences, “These are entities that belong to the town because they are there. And the more they become controlled by outside interests, the more the town loses its identity. It ’s somebody else’s, not theirs. As more businesses close, we see not only an economic impact, but also an emotional and psychological impact. They are losing a part of who they have been. A hospital controlled by outside interests is less theirs and they have less to say about it. These are important issues.” Rural communities are facing increasing pressures to keep their health care facilities viable, and network formation may be on the horizon for many.

Causes of the struggles
Struggles in rural hospitals across the country have similar causes. Journals and periodicals cite finances and demographics as two of the most predominant causes. Decreasing utilization exacerbates the financial woes of rural hospitals in an era of declining reimbursement because salaries, supplies, and overhead expenses are increasing rapidly on a per unit basis while per unit reimbursement is decreasing.

“In the last year or two, the problems have centered more and more around money, particularly reimbursement,” comments Gibbens. “The continuing pressure and squeeze on the finances of rural providers from Medicare and Blue Cross Blue Shield are twin villains, pardon my terminology. When you are a rural provider, you have very thin margins.

The significant change in demographics in North Dakota is also putting pressure on the rural communities. We have seen incredible depopulation over the last 20 years, which obviously impacts health care providers. Also, the remaining population is growing older in many counties.” Gibbens added, “Our demographics in North Dakota from a health care perspective have been working against us and they continue to work against us.”

Chris Champ, principal at Eide Bailly LLP, agrees that Medicare and Blue Cross Blue Shield reimbursement issues compound the problem even further. “If Medicare and Blue Cross do not provide relief for rural medical facilities, I would say that, in four to five years, we may only have about 25 hospitals in the state, maybe less.”

Another problem in rural areas is the difficulty in recruiting and retaining physicians and other health professionals. “One of the biggest losses for rural hospitals is the maintenance of physician practices,” Champ explained.

The cost of maintaining 24-hour emergency room coverage is also a major problem, according to Champ. Historically, many physicians covered the emergency room as part of their standard “on call” duties. Now, local physicians are reluctant to give up personal time to staff the ER, and hospitals have to pay outside doctors to fill this role. How much does a rural provider have to pay for physicians who cover the ER?“ You are looking at a range of $50,000 to $400,000 for the small rural providers. At larger rural hospitals, the cost could run as high as $900,000.The net revenue coming in from these services is probably only 20 to 30 percent of what the hospital pays out for ER coverage,” Champ said.

Champ cited other services provided by rural hospitals that no longer cover their operating costs because of low volume, including home health, hospice, home care, ambulance services, and obstetrics. According to the Rural Health Impact Facts, Rural Policy Research Institute, “Since 1980, more than 400 rural hospitals across the United States have closed.”

Medicare reform
Federal legislation aimed at reducing the Medicare budget may impact rural providers particularly hard since they rely heavily on Medicare reimbursement. At a 1999 Senate hearing, several witnesses presented testimony charging the Balanced Budget Act (BBA)with having “unintended consequences ” on rural hospitals. Gibbens noted, “From our surveys, we are seeing that the capital, formula-driven overpayment, and home health changes are causing the most problems. For a rural provider, a squeeze of $50,000 to $70,000 is a significant amount of money. The preliminary estimate from our surveys of what the BBA is costing them is an average of $116,000.

“There are many unintended consequences of the BBA,” Gibbens continued. “That ’s why we have two bills in the House and the Senate now that look back at the BBA and make adjustments. We cannot forget that the BBA itself was a positive step for the country, even though rural providers feel some of the negative consequences.”

Limited-service hospital alternatives
The BBA actually contained provisions to strengthen the rural health care infrastructure, including the Medicare Rural Hospital Flexibility Program, available to all 50 states. The statute calls for states to develop rural health plans that provide for the creation of one or more rural health networks. It is also intended to improve access for rural residents and promote regionalization of health services. A key component in this network arrangement is a new type of limited-service hospital referred to as a
Critical Access Hospital (CAH)and reimbursed based on reasonable costs for both inpatient and outpatient services.

Several states have had previous experiences with some type of limited-service hospital alternative. Both the Essential Access Community Hospital/Rural Primary Care Hospital
(EACH/RPCH) demonstration program and the Montana Medical Assistance Facility (MAF) Medicare waiver program were precursors to the CAH model. Some of these efforts were successful, and some fell short of adequately addressing the needs of both the rural hospital and the community in which it operated.

Tioga Medical Center is the only CAH in North Dakota as of July 1,1999,although several more are in the study or application phase. Gibbens believes the CAH program is a great opportunity. “CAH hospitals have greater latitude for staffing as well as increased reimbursement to maintain access,” he said. “The fundamental issue is access to care —both in the physical plant itself as well as the providers.”

But he cautions that “cost-based reimbursement is not the answer for everyone.” Champ echoed this sentiment. Eide Bailly LLP recently performed a preliminary analysis on CAH status for 30 rural facilities based on Medicare cost reports for one year. They found that 15 fared better with CAH status and 15 were worse based on the amount of reimbursement they would receive. The impact of CAH status ranged approximately from a positive $300,000 to a negative $300,000.

According to Champ, “The size of a hospital and the utilization and scope of services are major determinants of where the hospital would fall within that range.” In general, hospitals benefiting from this designation would be those treating short-term, low intensity patients and providing limited outpatient services including emergency medical services. They are also apt to have DRG payments less than costs, high Medicare inpatient utilization, Medicare outpatient costs greater than charges, and difficulties in retaining physicians.

Despite the pros and cons, it appears the CAH designation offers a viable alternative to a full-service hospital and maintains critical access to essential health care services for many rural communities.

Keys to survival
What is the key to maintaining critical access to care in rural areas? Gibbens sums it up in one word: money. “The rural providers need federal grants and subsidies and they need them soon. They have been squeezed, compressed, and degraded to the point where we risk seeing a handful or more of them close in the next few years.”

He believes the federal and state governments should create new grant or subsidy programs, similar to the Hill-Burton program of past years. But maintenance of the status quo is not necessarily the right path. “I don ’t think subsidization of the system as is makes sense,” Gibbens said. “Additional research and studies need to be conducted. The CAH program is the first big stab at studying what happens to access to care and quality of care when we make organizational changes.

“We need a rational way to determine where health care facilities should be located. Possibly, this could be a joint effort of the universities and the State Health Department. We can always perform empirical studies but we also need the communities to direct what services should be available.”

Another survival route may be the formation of some type of partnership. Urban-rural provider partnerships are becoming more commonplace as rural providers seek financial support and urban providers seek to maintain or expand their referral base. Currently, greater than half of the state’s rural hospitals have some type of relationship with another hospital or clinic. “I would caution any tertiary provider in trying to work with a rural community that they be very cognizant of the rural communities ’ emotions,” Gibbens added.

He acknowledged that his office has a very strong rural bias.“ As rural health becomes even more threatened and destabilized, we can ’t neglect the opportunities that present themselves when a large urban provider is able to work out a relationship with a rural provider.

“There are people who think ‘rural at any expense. Urban is always bad.’ I don ’t think that is realistic. We have seen our urban providers reach out to the rural areas in a number of cases. One of our responsibilities as an Office of Rural Health is to help rural and urban providers coexist in a collaborative situation.”

Gibbens takes an open-minded position on partnership. “I think it ’s inevitable. The rural health system is pretty fragile right now. There are two manners in which the urban partner can deal with this inevitable situation .They can take a fairly Draconian perspective, that this is just the way it is so it really doesn’t matter how they work out the relationships. The other way is for the urban partner to view the partnership as an investment, not only financial, but also as an economic development for that town. “Within a small community, the multiplier for the health care dollar is generally perceived
as being 1.5,which means that the health dollar multiplies as it flows through a community. Health is a big part of the economy in rural communities. It is like any investment. If the overall system you are investing in stays viable and strong, you stand a chance of getting a return on your dollar. But if that system starts to disintegrate, sooner or later it ’s going to impact your investment.”

Effective service diversification and organizational changes may better meet community needs while also improving the bottom line of some rural institutions. Champ described the importance of combining the operations of the hospital, nursing home, ambulance, home health, and clinic so “the community does not duplicate administrative and ancillary services.”

Resources available
Many state offices of rural health, like the UND Center for Rural Health, originally focused on fee-for-service physician recruitment and community assessments. They have since changed their plans to find better ways to benefit rural communities. The emphasis currently seems to be on education, workshops, and other forms of information exchange for communities to learn to do things themselves.

According to Gibbens, “People often don ’t recognize how community development relates to health care. They are linked together and it is really a central cornerstone in dealing with
rural health issues.”

The Rural Health Outreach and Rural Health Network Development grant programs, have provided resources to some rural facilities. “For outreach grants,” Gibbens noted, “you can receive funding either to enhance a service you are providing now or to create a new service that hasn’t been provided in the past. It can be anything from providing Alzheimer ’s treatment to providing a wellness program. We really stress these grants with rural communities, but they are not easy to get and are very competitive. The fact that North Dakota has received eight outreach grants ,in the eight years the program has existed is really a compliment to the providers in ND who have done such
a great job.

The two grant programs differ markedly in their philosophical direction, according to
Gibbens. “Outreach grants are meant to fund services and they will use a network to deliver those services. The emphasis is on the actual delivery of services rather than on the development of the organizational capabilities. With network development grants, the government is funding the network itself. They are trying to establish vertically integrated systems of care in rural communities. Implicitly, those networks will get involved with managed care and will be able to assume some degree of financial risk. They really don ’t say it but it is an effort to try to form rural-friendly managed care.”

Future of rural health care
The viability of rural providers amid the rapidly changing health care environment is a high-visibility health policy issue on the current agendas of local, state, and federal governments. Major environmental factors facing rural providers include the cost containment efforts of payers, the growth and increased life expectancies of the elderly population, economic stagnation, continued consolidation of the health care delivery system, increased competition, rapid expansion of technology, physician recruitment challenges, and increased consumer expectations.

Gibbens remains pragmatic about the future of rural health care. “If North Dakota is going to survive as a state, officially an urban state, we have to accept the changes,” he said. “If all we do is bemoan the trends we are seeing develop, we stand absolutely no chance of turning some of those negatives into positives. I really believe that our four large cities, Grand Forks, Fargo, Bismarck, and Minot, can only stay viable if rural North Dakota stays viable. Urban dwellers have a fiscal responsibility to contribute to small communities. If you are a small facility with a relationship with a large facility and that large facility can help you stay viable, your viability directly impacts, in a positive sense, that urban facility. I see very strong similarities between a philosophy for economic development and one for rural-urban health system development.”

Written by Colleen Bjugson and originally printed in the Blue Cross Blue Shield of North Dakota Health Care Discussions Summer/Fall 1999. Used with permission

Funding for Life Support is provided by a grant from USDA Rural Development