Research Eye on Policy

October 1999

Six of the nation’s rural health research programs offered a bird’s-eye view of some of public policy’s most recent and potential outcomes October 7th. The Capitol Hill program, Rural Research and Policy, was sponsored by the George Mason University Capital Area Rural Health Roundtable in collaboration with the federal Office of Rural Health Policy (ORHP), HRSA.

The forum yielded a broad array of information on rural conditions under several new and potential policy initiatives, with researchers reporting a mixed picture in areas such as children’s health insurance and rural home health services.  But in the sea of unknowns along the nation’s course for Medicare reform, a small iceberg of data has emerged that bodes serious trouble for rural hospitals and their integrated services.

Six Rural Hospitals

 Until recently, rural analysts have had only anecdotal accounts and simulations with old data to estimate the impact of the 1997 Balanced Budget Act (BBA) on rural hospitals with regard to Medicare’s new prospective payment (PPS) formulas for post-acute care services.  However, a new case study, presented Oct. 7th by WWAMI Rural Health Research Center director, Dr. Gary Hart, concludes that in six rural hospitals across the United States, the PPS payment reductions have, in fact, created dramatic financial downturns in just two years.

Under the BBA, an interim payment system for home health has already been imposed, which will give way to a prospective payment by late 2000.  Skilled nursing services are already under PPS and outpatiient services will be by the end of  2000.

 Each of the six hospitals -- in Iowa, Kentucky, Mississippi, Montana, Pennsylvania, and Texas -- were selected for study under a criteria of being small (under 50 beds), well-managed with stable administrations, in communities that had not suffered an economic crisis, and in diverse rural setting.  The University of Washington-led team conducted site visits and financial analyses of each institution.

While they determined that Medicaid and commercial managed care programs in those markets are also squeezing revenues, they identified “substantial and critical” impacts from Medicare payment on skilled nursing services and home health care.  Also according to the study, the BBA’s reductions will “sharply escalate in intensity” when prospective payment kicks in for outpatient.  However, the WWAMI authors report that the rural hospitals visited were so absorbed in managing their current downward spirals that they had given little attention to preparing for the larger outpatient payment cutbacks yet to come.

Ironically, the study found that of the six hospitals, those which have diversified most will be hardest hit.  Diversification has been the mantra of survival for rural hospitals following the 1983 introduction of Medicare prospective payment for acute care.  All of the six hospitals studied have extensive outpatient services, five have home health agencies, and two have skilled nursing facilities.

Hart said the study shows the compound vulnerability of this diversification under the new PPS systems. “The combined BBA effect on the six hospitals is a dramatic reduction in Medicare income that can threaten the hospitals’ viability,” he said.  Four of the six hospitals are currently in the red, while the remaining two are only marginally in the black, according to the study.  Five out of the six hospital operating margins have dropped by anywhere from 25 percent (Mississippi) to 500 percent (Pennsylvania), with the Kentucky hospital gaining 133% due to a one-time payment.

Hart said one of the six hospitals may be able to convert to Critical Access Hospital status, a program that allows for Medicare cost-based reimbursement.  But services like obstetrics, surgery and dialysis, which residents need to have within a 50 mile radius, would be forfeited in such a downsizing, he said.  According to the study, access to services in each of the six communities has already been affected, with closure of outlying clinics, a cancelled upgrade of surgery facilities, nursing lay-offs, reductions in physical therapy, occupational therapy, speech therapy, and substantial reductions in home health staffing and service.

 To put his case study in some perspective, Hart said that of the nation’s 2,300 rural hospitals, 1000 are small (fewer than 50 beds). He said 21% of these provide all three of the services coming under PPS and 72% provide two of the three services.  “Literally, every hospital is going to be hit by two or three of the PPS systems that we’re talking about.”

Home Health

 In a simulation study of home health agencies, presented by the Project HOPE Walsh Center for Rural Health Analysis, Dr. Curt Mueller said Medicare’s Interim Payment System now in effect results in reductions of as much as 39.6% for new agencies and just 9.4% for established agencies, with no discernible differences between rurals and urbans. There were dramatic regional variations, however, with the greatest revenue losses estimated for Texas, Oklahoma, and Louisiana.

The study also showed hospital-based agencies faring somewhat better than free-standing agencies, but Mueller said rural home health service is not necessarily better off.
“Disproportionately more rural home health agencies are hospital based,”  he said, and compared with urban hospitals,  “it is important to keep in mind that rural hospitals are much more dependent on home health.”  Another recent study by the HOPE center classified 422 of the nation’s general hospitals as highly dependent on at least two of the three post-acute care services targeted by the BBA.  Four-fifths are rural.

Critical Access Hospitals

 Among a large group of rural hospitals that average fewer than 10 inpatients a day, however, the BBA’s new program for conversion to a limited service, Critical Access Hospital seems to be a viable, working option, according to a recent survey by the North Carolina Rural Health Research and Policy Analysis Program.  Presenting at the Roundtable forum, North Carolina research director Dr. Tom Ricketts said that as of  October, 76 hospitals in 16 states have been formally designated for conversion to Critical Access Hospital status (CAH) and another 20 in 9 additional states are moving toward or in the formal application process.

 While the limited service, (15 acute-care bed) CAH is modeled on former demonstration projects in six states, the new Rural Hospital Flexibility Program allows states to set criteria and provides up to $700,000 per state to assist hospitals with conversion planning.  The North Carolina study is the first comprehensive survey of how those funds are being used.

 Ricketts said all CAH designees and the 120 in process had average occupancies in 1997 of 36%.  Also, 68% of  hospitals in this group are located in counties designated as Health Professions Shortage Areas.  In the survey most states report using the funds to provide community assessments, hospital financial analyses, support network development, and rural emergency medical services.  Another finding of the survey was that states (39) have or are considering adopting a state-Medicaid policy of cost-based reimbursement in some form for their CAHs.

 State comments on the program include a call for more flexibility for CAHs, with  a four-day average length of stay, and a less restrictive definition of rural location.  But overall, said Ricketts,  “the CAH program is well underway [and] it appears that the hospitals are the appropriate types in the appropriate places.”

Children’s Health Insurance

On yet another policy front, the Maine Rural Health Research Center at the University of Southern Maine has been studying rural enrollment rates under the new State Children's Health Insurance Program (S-CHIP), also ushered in with the BBA in 1997.   Center director, Dr. Andrew Coburn, said the program is underutilized by rural children at this point.

While the program does not require states to seek out a proportionate share of rural children, they are the subject of strong interest because they are 25-50 % more likely to be uninsured than urban children, more often lack employer-provided plans, and have more multiple spells of uninsurance.   On the opportunity side, they are more likely to fall within the program’s target range of 100-200 % of poverty.

 While the difficulty of administering “information outreach” and enrollments for a geographically scattered population has been a major focus of strategists, the Maine center’s analysis indicates that state eligibility standards are also a likely factor in keeping enrollments low.  Coburn offered a map of the states arrayed according to both their proportion of rural children and the eligibility standards each has set for the program, which ranged from 125% to 300% of poverty.  There are many rural states with a high proportion of rural children and low eligibility standards, said Coburn.  “To some degree, this is not just about outreach,” he concluded.  “Eligibility is still an issue with respect to getting states to expand access to this CHIP program.”

On the Horizon

 Beyond the wide-sweep of the BBA, other policies loom that are no less urgent to rural health services, according to two additional Roundtable presentations.  Dr. Keith Mueller of the Rural Policy Research Institute (RUPRI), a multi-state research consortium, addressed the issue of Congress’ longer range goal to restructure Medicare.  Proposals range from creating a fixed benefit package to establishing a premium support payment that would leave beneficiaries to shop for their own insurance plans and providers.  The latter would move government out of price setting and let beneficiaries take advantage of a competitive market.

The RUPRI panel has concluded that at least initially rural beneficiaries will not benefit from the market, given the smaller number of plans based in or serving rural areas.   Mueller said they will likely “pay premiums that will shift dollars from rural to urban areas.”  Lest rural beneficiaries have little or no service choices, Mueller said advocates of the premium support approach should require insurance plans pay full cost to essential rural providers and assure reasonable access to primary and emergency care.  Meanwhile, RUPRI is preparing an analytic framework for evaluating all new Medicare proposals -- testing the assumptions of the restructuring movement against “rural realities. .

On yet another front, Dr. Ira Moscovice, director of the University of Minnesota Rural Health Research Center, spoke of the need for more rural-relevant quality measurement systems, now that private insurers, accreditation organizations, Medicare and Medicaid programs are demanding comparability, data-driven reporting systems and more outcome measures.  The Minnesota center has produced a white paper, Quality of Care Challenges for Rural Health, which explores the technical and philosophical dimensions of this undertaking in rural areas.

“Sample size” or the small denominator of rural provider data is the biggest obstacle to meaningful data measurement, Moscovice said.  One poor outcome in a small sample can skew a rural provider’s performance profile compared with high volume facilities.  Another problem, he said, is that sophisticated data collection and report generating systems are expensive and unrealistic for many small providers.  He called for national efforts to help small providers participate, perhaps on a regional basis.  Finally, Moscovice made a plea for national common sense, given the conditions and practice options that range from frontier to urban subspecialty environments.  Quality measurement should always be linked to access considerations, he said.  “There never will be just one set of standards.”