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Taking care: Small rural hospitals face uncertain future under Affordable Care Act

By Cristina Janney
updated: 12/11/2013 4:39 PM

The rollout of the Affordable Care Act has already set off significant change and uproar around individual insurance plans. As the ACA settles into place in 2014, more change and concerns are coming to small rural hospitals.

Under the ACA, small rural hospitals will see significant reductions in traditional Medicare payments, and some will see new payment requirements for patient care. Rural hospitals rely on Medicare payments -- which primarily cover older people -- for almost 45 percent of their annual income.

The changes in how Medicare money reaches rural hospitals -- and all hospitals around the country -- are an attempt by federal lawmakers to improve health care and reduce costs.

Among the goals is to measure and reward quality of care, and reduce expensive uninsured visits to hospital emergency rooms. By having more people covered by insurance, the theory goes, there will be higher numbers of paying patients and less unpaid debt.

Hospital administrators say they will have to change services and staffing to become more efficient and put more resources into primary care to reduce unnecessary hospital admissions.

Administrators also say the changes will be difficult at a time when rural hospitals already face tough economics. Rural hospitals work on a much smaller scale than their urban counterparts and so have a history of operating on small margins. The recent recession, sequestration cuts in Medicare and drops in patient volume as rural populations shrink have all left rural hospitals financially vulnerable. About 40 percent of rural hospitals operate at a loss, said Maggie Elehwany, government affairs and policy vice president of the National Rural Health Association.

"We are dealing with cuts that already have gone into place that are not part of ACA," said Tim Size, executive director at Rural Wisconsin Health Cooperative. "There is a lot of cacophony and chaos surrounding the ACA. We are dying the death of 1,000 cuts and no one looking at the big picture."

Under the Affordable Care Act, there will be a $196 billion reduction in annual increases in Medicare payments to hospitals, skilled nursing facilities and ambulatory surgical centers over 10 years.

Rural hospitals work under different payment schemes. Some receive a flat Medicare payment for patient care. Others are paid per service. Some rural hospitals paid per service will see additional cuts in special payments that help support hospitals with high numbers of Medicare patients. No matter how they receive federal funds for Medicare, all rural hospitals face significant cuts in coming years.

Rural hospitals' response to the new system likely will change how patients receive care and what services the hospitals provide.


A major thrust of the Affordable Care Act is to improve the quality of health care and raise the overall health of Americans. So the ACA will tie millions in federal funds to quality of care, basing payments on positive outcomes.

Hospitals traditionally have received Medicare payments based on the number of procedures they perform. The industry calls this volume-based purchasing. Starting this year under the ACA and expanding in fiscal years 2014 and 2015, Medicare payments will be based on the quality of treatment patients receive. A payment system based on quality of care is known as value-based purchasing.

In order to reward quality, there will have to be measures of quality. Hospitals will gain or lose 1 percent of Medicare funding depending on 20 factors that gauge quality of care. Quality of care will be measured via checklists on specific actions hospitals are expected to take and data collected from patient surveys.

Some patient care standards are very specific and at this point only cover certain illnesses. They might include making sure a surgery patient receives a preventive antibiotic or a heart failure patient receives appropriate discharge instructions.

The Centers for Medicaid and Medicare, the federal agency that administers Medicare, has established benchmarks for a variety of quality measures. For example, the benchmark is 89 percent for providing adequate discharge information for an individual hospital.

Another measure of quality is the number of Medicare patients readmitted to a hospital shortly after receiving care. Readmissions are expensive and the new law aims to reduce them. In 2010, the Centers for Medicaid and Medicare found 19 percent of Medicare patients were readmitted to the hospital within 30 days of discharge, at a cost of $1.7 billion. CMS began penalizing hospitals with reduced payments for excessive numbers of readmissions starting in 2012. Penalties will be a maximum of 3 percent of hospitals' billing in fiscal year 2015. Readmissions are measured among Medicare patients treated for heart failure, heart attack and pneumonia.

To protect their Medicare payments, some hospitals are starting new programs to meet the new requirements and quality benchmarks.

Barton Memorial Hospital in Lake Tahoe is using RNs as health coaches who work with patients after discharge to reduce readmissions. Monica Sciuto, director of public relations and marketing, said the hospital had to find additional funding to support the program, but saw it as a worthwhile investment. "The money we put into this will save us money in the long run from not having patients coming back into the hospital where it would be completely on the hospital's dime," she said.

Another goal is to reduce medical errors. Avoidable medical errors added $19.5 billion to the nation's health care bill in 2008, according to a claims-based study conducted by Milliman Inc. on behalf of the Society of Actuaries. The Centers for Medicaid and Medicare will track whether hospitals perform certain best practices to help reduce errors. Hospitals will not be penalized for the errors themselves.

Screening patients to better understand their conditions, for example, is one step hospitals can take to reduce errors. Royce Holdeman, CFO of Mercy Hospital in Moundridge, Kan., said Mercy now tests all patients admitted for pneumonia to determine the best antibiotics for that person's strain of pneumonia.

Although this new program has showed positive results, Holdeman said rural hospitals with limited resources can only do so much. Financially, it becomes a matter of scale.

Large hospitals with higher patient volumes can afford many new programs that small, rural hospitals cannot, Holdeman said. Mercy Hospital counts about 950 "patient days" per year. One patient day is roughly one person staying in the hospital for one day. An urban hospital may have more than 100,000 patient days per year. Working on that smaller scale, Holdeman said, limits what rural hospitals can do to improve care.

In an effort to overcome that challenge of scale, rural hospitals are banding together to develop practices and programs to improve health care quality.

Rural hospitals in some states are forming Hospital Engagement Networks, which bring health educators in to work with hospital staff on best practices, such as approaches to reducing hospital-acquired infections and harmful medication interactions. The network collaborations help rural hospitals improve quality of care so they can maximize Medicare payments. A Louisiana Hospital Engagement Network, for example, has helped decrease pre-term births at its participating hospitals by 40 percent.

Hospitals and other health care providers also are forming Accountable Care Organizations, groups designed to improve coordination and management of patient care. The idea is to have a team look at the whole patient to improve care and reduce hospital admissions. These organizations then issue one bill for a bundle of services, rather than Medicare receiving a series of bills for each service.

An Accountable Care Organization can include a physicians group, hospital and other auxiliary services. In theory, both the hospital and Medicare save money because the patient is healthier. These groups can keep some of the savings they create. However, Accountable Care Organizations also assumes risk if costs increase.

But scale also can be a challenge for rural hospitals interested in joining an Accountable Care Organization. Under the Affordable Care Act, an ACO must have 5,000 patients, far more than many rural communities have. A community hospital might have 1,000 patient days, and just hundreds of Medicare patients per year. A metro hospital with more than 100,000 patient days may see thousands of Medicare patients annually.

Margaret Mary Hospital of Batesville, Ind., has dealt with the scale issue by joining the National Rural Accountable Care Organization, which will include nine other hospitals, some smaller and some larger. This national organization helps small member hospitals meet the 5,000-patient requirement and share ways to increase efficiency.

Tim Putnam, president and CEO of Margaret Mary Hospital, said sharing ideas and best practices tailored to small hospitals helps launch programs that can have "amazing results."


Rural hospitals facing significant cuts in Medicare payments hope by cooperating more closely with primary care providers they can reduce hospital admissions overall, prevent costly readmission penalties and reduce bad debt losses.
Adam Higman is vice president with Soyring Consulting, which has worked with health care clients in more than 35 states. He said the Affordable Care Act's cuts in Medicare payments, and emphasis on keeping people healthy with fewer hospital visits, are pushing hospitals to think more about what happens outside their walls.

More hospitals are forming partnerships with physician groups, essentially becoming community health systems, to work with people on better preventative care and to better manage care after a hospitalization.

Primary care providers include primary care doctors, nurse practitioners and physician assistants. Experts say primary care is more effective care -- in quality and costs -- because providers usually know their patients better, have complete medical records, and can help patients manage chronic conditions to prevent acute problems that require emergency room or inpatient care. A patient who sees a primary care physician may have a copay of $25. A trip to the emergency room could cost hundreds of dollars.

People with little or no insurance still may go to a hospital emergency room instead of a primary care doctor. Rural hospitals often serve communities with higher percentages of poverty and see more uninsured patients. The U.S. Census Bureau reported 16.6 percent of families in rural health services areas were in poverty compared to 13.9 percent from metro areas. As a result, rural hospitals tend to have higher amounts of bad debt written off as charity care for the uninsured. For example, Barton Memorial Hospital had revenues of about $143 million in 2012 and wrote off about $4 million in charity care.

The Affordable Care Act was supposed to make it easier for low-income individuals to access care by expanding Medicaid, which provides health services to the poor. This, in theory, would mean hospitals would have more paying patients and soften the blow of Medicare cuts.

One glitch in the plan, however, is the battle over expanding Medicaid coverage to more individuals. Under the Affordable Care Act, federal money for Medicaid would increase so more people could be covered. Federal Medicaid money is managed at the state level.

Then in June 2012, the U.S. Supreme Court ruled states could choose whether they wanted to expand Medicaid. This set off battles in state legislatures over whether to accept the increased federal funds. So far, 25 states have voted to expand their Medicaid programs and 25 have not.

Maggie Elehwany, vice president of government affairs and policy with the National Rural Health Association, said in states where Medicaid is not expanding many rural patients will fall through the cracks. In those states, low-income individuals will make too much money to qualify for current Medicaid programs and too little money to buy insurance in the new Affordable Care Act marketplaces.

Robert Lee, a professor who teaches health care economics at the University of Kansas, said rural hospitals in states that do not expand Medicaid will have a much harder time offsetting the Medicare cuts.

Louisiana is one of the states that has decided not to expand Medicaid, which will leave about 400,000 people in that state without insurance. Karen Zoeller of the Louisiana Hospital Association said unpaid bills from people without insurance who turn to hospitals will continue to drive bad debt for hospitals.

Kansas is another state that has not expanded Medicaid. McPherson Hospital in McPherson, Kan., is trying to maintain quality care even with increasing levels of charity care and reductions in Medicare payments. The hospital has seen a $500,000 increase in bad debt since 2008 when the recession began. With an operating budget of $23.4 million, the hospital has written off more than $925,000 in charity care in 2013.


With or without additional money from Medicaid expansion, rural hospitals will still have to find a number of ways to adjust to the Affordable Care Act's reductions in Medicare payments. In many cases, that will mean changes in services and staffing.

In pursuit of the new law's quality standards, rural hospitals may add some programs and services. To save money, hospitals also may have to reduce other services and cut or reallocate staff.

Here again, for small rural hospitals part of the problem is scale, not enough patients to pay for some of the more expensive services. Under-used programs and facilities may have to close. Some services may need to be contracted out to regional providers.

Blaine Miller, the administrator at the Republic County Hospital in Belleville, Kan., said his hospital has made all the cuts in staffing it can make in the wake of previous cuts in federal payments. Now the hospital is considering closing a 38-bed long-term care facility.
Miller said the hospital analyzed operating costs against federal reimbursement rates. The hospital gets better Medicare reimbursement rates for inpatient care compared to long-term care. The hospital is considering closing the unit because it will save $500,000 per year. Miller said the hospital might lease the facility or partner with another long-term facility for services.

Adam Higman at Soyring Consulting said rural hospitals around the country are making similar difficult decisions. His firm has worked with rural hospitals on plans to close units or contract for services such as long-term care and psychiatric or obstetric services. Higman said obstetric services are especially costly and complicated to maintain given the low patient volumes at many rural hospitals.

Perry Memorial Hospital in Princeton, Ill., will close its obstetrics department as of Dec. 31 after 93 years of delivering babies at the hospital. When the unit closes, related educational programs and support groups also will end. Perry Memorial can still deliver babies in an emergency. But most new mothers in Princeton will have to drive 25 miles to the nearest hospital obstetrics unit.

Perry Memorial president and CEO Rex Conger said the hospital is facing $1 million in federal cuts to its operating budget this year. He said the hospital can't afford to run the obstetrics department in the face of such significant cuts.

Cindy Samuelson, VP of member services and public relations for the Kansas Hospital Association, said an association study indicated Kansas hospitals would see $1.3 billion in federal cuts over 10 years under the Affordable Care Act. Samuelson said some hospitals in Kansas are looking at hiring or wage freezes. Other hospitals may reduce clinic hours or clinic days to absorb the cuts.


The Affordable Care Act is bringing many changes to the health care industry.

For rural hospitals, cuts in Medicare reimbursements and a new payment system based on quality of care is likely to bring significant changes to how small hospitals serve rural communities across the country.

And for rural hospitals used to small profit margins and low patient volumes, these changes present a challenge. Some are already forming networks with other hospitals and primary care providers to find cost savings and best practices that can help meet the new requirements. Medicaid and the number of people who obtain insurance also will be factors in the economic equation for rural hospitals.

Experts believe some rural hospitals will not be able to make the adjustments and will be forced to close their doors. In other hospitals, there will be program cuts, likely in long-term care units, in-patient mental health units and obstetrics departments, which are expensive to maintain in small towns. As a result, residents will have to seek care in more distant regional health centers.

Tim Putnam, CEO of Margaret Mary Hospital in Indiana, works with master of health care administration students at Xavier University, Indiana University and University of Kentucky. Putnam said the next generation of health care leaders see the current delivery system as ineffective. He said he sees hope for improvements in health care under the Affordable Care Act.

"There are a lot of bright eyes in the next generation of heath care leaders -- physicians and nurses and administrators who can't wait to get a hold of this," Putnam said. "As frustrating as it is for people now, the next generation is really excited about the delivery models changing and being more focused on wellness."

Cristina Janney is managing editor of the McPherson Sentinel in McPherson, Kan. She spent four weeks researching and writing about the Affordable Care Act's effect on rural hospitals as part of the Pinnacle project reporting program for GateHouse Media Inc.

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