The U.S. has seen the fortunate few garner enormous income and profit in health care. Whereas services provided by physicians account for a combined 10 percent of health care costs, the U.S. would have a cost crisis even if physicians worked for free. For-profit hospital systems have a fiduciary responsibility to shareholders rather than the communities they serve and are considered by many to be controversial.
In the face of controversy over alleged kickback violations and fraudulent billing of Medicaid nearing $1 billion in total, not to mention poor financial performance, the outgoing Tenet Healthcare Corporation’s chief executive officer (CEO) is to be awarded $23 million in severance. Public companies, such as UnitedHealth Group, a for-profit managed health care company, have made huge profits for their shareholders. In the past 19 years, UnitedHealth Group has seen returns of greater than 4,500 percent, or 22.4 percent annually. During his tenure as CEO of UnitedHealth Group, Stephen Hemsley’s total annual compensation has reached a peak of more than $100 million. Judith Faulkner, CEO of the privately held health care software company Epic Systems Corporation, is now reported to be a billionaire 2.5 times over.
While a few executives amass fortunes in health care, millions of patients are at risk of losing access to local health care due in part to the increasing number of hospital closures. Although urban hospitals also are at risk, most of the hospital closures have been in rural areas. As expected, most of these hospital closures are due to poor financial performance.
The rise and fall of rural hospitals
In 1946, Congress passed the Hill-Burton Act, which provided federal funding for the building of not-for-profit community hospitals contingent upon caring for medically indigent patients. This Act helped to fund 6,800 facilities in more than 4,000 communities. To rein in Medicare spending, the prospective payment system (PPS) was implemented in 1983.
Many rural hospitals closed over the next decade. In 1997, Congress passed legislation establishing the Medicare Rural Hospital Flexibility Program, which granted critical access hospitals (CAHs) reimbursement based on a reasonable cost basis for Medicare beneficiaries. Today, of the 5,000 short-term care hospitals in the U.S., more than 53 percent are CAHs.
The North Carolina Rural Health Research Program presented its findings at the American Hospital Association (AHA) 30th Rural Healthcare Leadership Conference in February 2017. As depicted in Figure 1, 122 rural hospitals have closed over 10 years.
Figure 1. Rural hospital closures January 2005 to December 2016
Their research determined that many factors were associated with rural hospital closures. For instance, most of the hospital closures were in the South, and 57 percent of closures since 2010 were in states without Medicaid expansion. The researchers also noted that many hospital closures were due to poor market share in more competitive markets, or because the hospitals were located in areas of higher unemployment and/or greater health disparities.
In 2016, iVantage Health Analytics published a study in which the authors coined the term “vulnerability index,” which is based on 70 indicators, such as market strength, population risk, quality, patient safety, patient satisfaction, outcomes, and financial stability, compared to 62 closed hospitals. The study determined that 673 rural facilities were at risk of closing, translating into the loss of 11.7 million health care encounters and 99,000 health care jobs. This same study also showed that rural facilities charge more but incur fewer costs, especially for outpatient services.
Challenges facing rural hospitals
Although all hospitals are struggling to maintain a narrow 2 to 4 percent profit margin in the face of increasing bad debt (uncollectable debt reported on income statement as bad debt expense or uncollectable accounts expense) due to high patient deductibles, copayments, and declines in reimbursement, smaller hospitals are seeing an out-migration of commercial payors, resulting in a higher proportion of Medicare and Medicaid patients. The operational costs of small hospitals are proportionally higher in fixed costs with few variable costs. For instance, remote hospitals must devote more capital to inventory in contrast to the just-in-time inventory systems of urban centers.
Smaller hospitals also have higher salary and benefits-to-net-revenue ratios. Rural hospitals struggle with physician recruitment and retention and often only have access to a limited workforce.
Many rural hospitals are also challenged by governance that lacks expertise. For instance, a referral center in Seattle, WA, is governed by an appointed board composed of leaders in other quality-driven complex industries, such as Boeing and Microsoft. A rural district hospital is governed by an elected board of local community leaders, often with no experience in operating complex industries. For-profit health care companies have shuttered their small hospitals as part of a business strategy, rather than based on an assessment of community needs.
Smaller hospitals have struggled with the capital and resources required for government-mandated electronic health record implementation. Costs associated with information technology infrastructure (such as labor, hardware, and training) and lost productivity from implementation often exceed budgets. Additionally, the number of data breaches has skyrocketed, as have the costs associated with increasing security. In fact, more than $34 billion was reportedly spent responding to security breaches in the first six months of 2015, exceeding the total amount of federal incentives paid through the Health Information Technology for Economic and Clinical Health Act to make this transition happen. Many hospitals did not anticipate these costs.
The future health care model is evolving. The U.S. is realizing increasing divergence between hospital supply and demand while the demand for health care professionals is increasing.
Complex service lines, such as cancer care and cardiovascular interventions, are transitioning to outpatient models. Despite the aging baby boomers, the demand for inpatient services is expected to decline, while outpatient services will increase disproportionately. Rural hospitals will have to position for an outpatient health care model and determine which inpatient services are sustainable. Because obstetrics is often a high-resource but low-revenue service line, many rural hospitals have discontinued this service. Losing access to rural emergency obstetrics services may place young lives at risk.
The health care market is now seeing price elasticity for patients with commercial insurance, meaning the demand changes with price change. Historically, consumers were insured through their employer with relatively small out-of-pocket costs, so consumers were price inelastic. Now, many consumers have high deductible and high copayment insurance plans, making the market price elastic. Health care consumers are shopping for outpatient and even elective inpatient services, often basing their decisions on price. Because hospitals set their charge master to cover costs for 24/7 access to services and indigent care, inpatient facilities cannot price compete with freestanding outpatient radiology, lab, and surgery centers.
The conundrum of attaining quality data
Not only do rural hospitals have scarce resources for quality reporting, but they also are challenged by reporting rates based on small sample sizes, resulting in a much higher likelihood of sampling error. Because a measured rate only estimates the actual rate, sample sizes are important and often overlooked. A rate of 10 percent is much less significant in a sample size of 10 than in a sample size of 100. Large centers have the resources to muddy the statistical waters. For instance, transferring patients to the hospice service may decrease a service line’s mortality rate. Rural centers may need to combine data over several years to achieve meaningful sample sizes. However, rural hospitals need to provide preemptive quality data, especially in the higher volume service lines, such as endoscopy, and compare themselves to national quality benchmarks. Perhaps rural hospitals could share the full-time employees required for rural reporting to the American College of Surgeons National Surgical Quality Improvement Program (ACS NSQIP®) as a means of affordability.
Hospitals, churches, and schools are said to make up the three-legged stool of the rural community. Rural hospitals often act as a safety net. When hospitals close, the community loses access to nearby emergency care. Physicians and other providers often leave the community, and access to visiting specialists is lost. The older, poorer, and sicker patients of rural communities often lack resources to travel for health care, so they go without. Because hospitals serve as an economic multiplier of their communities, a hospital closure results in lost jobs, closure of businesses, and loss of tax revenue. However, low-volume hospitals may still be able to serve their communities by providing outpatient-only services, such as emergency department, radiology, clinics, and laboratory services.
Because surgeons are often the financial lifeline of rural hospitals, the ACS needs to continue to support rural surgery and the training of general surgeons. The success of the rural listserve (thanks to Philip Caropreso, MD, FACS, and others) was the catalyst for starting the ACS Communities.
Creating the Advisory Council for Rural Surgery (ACRS) was another huge leap forward. The work of the ACRS has led to projects with the intent of creating or preserving quality rural care, such as the ACS locum tenens proposal (see statement). The goal is to design a business plan that not only provides relief for surgeons, but offers attractive compensation to surgeons at an affordable cost to hospitals.
The ACRS is also instrumental in studying the optimal resources required for rural surgeons to provide quality care. Rural surgeons must have the infrastructure in place to be successful. The ACRS sponsored a session regarding cancer care in the rural setting at Clinical Congress 2017.
The ACS Division of Advocacy and Health Policy (DAHP) is closely monitoring the 96-hour rule, which requires surgeons to certify that a Medicare patient would reasonably be expected to be discharged or transferred within 96 hours as a condition of payment in CAHs. DAHP is also working to see that rural areas qualify as Health Professional Shortage Areas. The College’s continued support for rural surgery will help to sustain rural hospitals and, thereby, save lives.
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