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Rural Health Roundtable

Health Care: A Growth Industry for Rural America

June 1997

Rural Promise

Health care spending represents about 14 percent of this nation’s economic activity. A disproportionately large share of this activity is concentrated in urban areas. Health insurance premiums and tax dollars destined to become Medicare and Medicaid payments flow out of rural communities. The return flow of these dollars is diminished for three interrelated reasons: 1) health services and resources are concentrated in urban areas; 2) reimbursement rates are higher for urban providers; and 3) rural residents travel to urban areas to seek care.

How high are the stakes for rural communities if these transfers continue? In 1995, U.S. per capita expenditures for health care were $3,621.¹ Using this figure as a benchmark, multiplied by approximately 54 million persons estimated to be living in rural (i.e., nonmetropolitan) America in 1996,² we can conclude that somewhere around $195 billion is spent each year to provide health care to rural Americans.

The real issue is where this spending occurs. Studies indicate³ that a considerable amount of this spending actually occurs in urban areas, as rural residents drive to the city. Some of this economic "leakage" is unavoidable and appropriate, as in the case of extremely specialized services that cannot be provided in even the largest rural towns and cities of 40,000-50,000 people. However, a significant proportion of the patients and dollars that flow to urban areas could legitimately stay in rural areas—if the rural health system were strengthened and organized in a fashion that encouraged local utilization of services. The impact of local health care spending is magnified because every health care dollar recycles through the local economy one-and-a-half times. For example, every rural physician generates more than five jobs and over $233,000 in income to the local economy.⁴

Health care services employed more people than any other industry in rural America in 1996, accounting for one of every twelve workers. Perhaps more importantly, health care is one of the fastest growing sectors of the rural economy. Between 1990 and 1996, rural health care employment increased by almost 400,000 persons, accounting for nearly one of every seven jobs added in rural communities during the period. In fact, health care employment has grown more rapidly in rural than urban areas since 1990, increasing by 3.2 percent per year on average. Most of the job growth occurred outside hospitals among employers who typically serve smaller populations than hospitals, including medical and dental offices, nursing homes, and home health care services.⁵

The health care industry is expected to continue to grow at a substantial pace. The Congressional Budget Office projects national health expenditures will nearly double during the next 10 years, to slightly more than $2 trillion.⁶ Much of this is due to the sheer force of demographics. Even without an increase in the price or use of health care services, the total population, and especially the elderly cohort of the population, will continue to grow. Thus, health care spending will continue to grow in a manner that makes health care an industry of immense potential from the standpoint of rural economic development. One of the cardinal rules of economic development is to focus on growth industries, as opposed to industries that are only stable, mature, or declining.

Fueling the Local Economy

Today, the health services sector contributes broadly to rural economic and community goals in at least six ways:

1) Generating employment. In addition to employment in the local health sector, additional jobs are created as health care workers spend their income locally.

2) Increasing productivity, by keeping people healthy and reducing absenteeism.

3) Attracting and retaining residents. Adequate health services—especially for retirees—are an important factor influencing where people live, and subsequently spend their incomes.

4) Attracting and retaining businesses, by providing a desirable array of health services that make the community a more attractive place to do business.

5) Generating investment funds. Hospitals and nursing homes require a considerable amount of cash and short-term investment funds to meet their payrolls. When held in local financial institutions, these funds then become available to local individuals and businesses who wish to invest in the local economy.

6) Contributing to local leadership capacity. Leadership is a critical element of community development and health care providers can become an important part of the local leadership pool.

Apart from the fact that health care is a growth industry that has considerable impact on the local economy, other important developments in this industry may bode well for rural areas. There is potential to increase the availability of medical specialty services to rural areas, especially as "telehealth" enables subspecialty consultations to take place locally within the rural hospital and clinic. There has also been an increase in the availability of primary care practitioners in some areas, especially nurse practitioners, physician assistants, and osteopathic physicians. Trends in the decentralization and deinstitutionalization of services are permitting services like home health care to substitute for in-patient hospital care in many situations. This trend moves care and related expenditures from urban hospitals back to rural providers and the communities of rural patients. Finally, some "rural-friendly" policy shifts are under construction. Low Medicare payments for rural managed care may be increased by Congress. Additionally, Congress is considering expanding Medicare reimbursement for "limited service hospital" models that would allow rural communities to develop more economical and appropriate facilities.

What Needs to Happen

In general, lower intensity and lower cost of care in rural communities is advantageous in an era of cost containment. This reality, combined with health care as a growth industry, creates a golden opportunity for growth of health services in rural areas on a regional basis. However, its realization requires several factors to fall into place:

1) Rural communities must become aware of the economic and job creation opportunities generated by the health care sector.

2) Strong and visionary leadership must help local communities, providers, and residents to move beyond the historical pattern of each community having its "own" hospital, doctor, etc. Instead, what is needed is a multicommunity or regional approach that allows for provision of an integrated and comprehensive set of services that can be priced competitively—and presumably made available on a capitated basis. To maximize the economic contribution of such an approach to the larger economy of rural America, the following strategies are recommended:

n Expand the range of services that can be provided in a cost-effective fashion in rural America. It is important to realize that within this broader regional vision, large rural communities of 40,000-50,000 people can provide a wide range of fairly sophisticated services. Similarly, smaller communities can provide a broad range of primary, preventive, wellness, home health, residential care, and other such services.

n Eliminate or reduce the flow of rural residents to urban areas for services that are available within the rural regional system.

n When possible, keep ownership, profits, control, hiring, and the purchase of health care inputs and supplies within the rural regional system.

Such regional systems will be in a position to create and offer competitively priced health care plans, and thereby capture a relatively high proportion of Medicare, Medicaid, and private health insurance dollars. This multicommunity and multi-institutional vision also means some loss of individual community and provider identity. Resisting these changes forfeits an opportunity for economic development. A modest investment by government, foundations, and nongovernmental organizations in organizing rural health systems could help rural America create the vision and action needed to capitalize on this opportunity.

A Case In Point

Is it possible for communities and providers to organize themselves and act on the vision of health care as a growth industry? Absolutely. For example, the Appalachian Regional Healthcare Hospital in Harlan, Kentucky, added 19 percent to its in-patient occupancy and 27 percent to its operating margin in one year.⁷ The hospital payroll rose from 317 to 392 people, and 52 other health-related jobs were created. This economic success was the result of a community development effort by local citizens and providers to identify their health care needs and develop a real plan to address them. This countywide process, was broad-based and involved dozens of concerned citizens. Through this effort, the hospital enacted significant changes, including emergency room management, physician appointment timeliness, hospital housekeeping, and ambulance services. As a result of this effort, at least $4 million was added to the economy of this chronically distressed Appalachian county.

While the Harlan County effort was accomplished by improving existing services within current organizational structures, the basic structural changes sweeping through health care will bring new challenges and associated opportunities to Harlan and other rural counties. Some rural communities have already begun to position themselves in this new environment. For example, a recent report describes 32 rural-based organizations in 13 states that are developing their own insurance packages—including capitated plans—in order to be effective players in today’s managed care environment.⁸ Some states may do as Texas has done: form a new statewide rural HMO that brings the ability to directly participate in the insurance role to all rural Texas communities.⁹ In general, these new approaches provide the opportunity for locally developed and owned plans to contract directly with local providers to the extent practical, thereby ensuring that more health care dollars stay at home.

The Challenge and Threat of Managed Care

In terms of managed care, the critical challenge for rural communities and their providers is to embrace a vision for themselves, rather than resist change. In recent years, the prospect of managed care has caused many rural providers to contemplate drawing lines of defense around their communities. Certainly, as managed care plans expand their markets beyond cities and as states mandate that more of their Medicaid clients participate, managed care presents a double-edged sword for rural communities.¹⁰ The emphasis on coordination and prevention should mean improved access, better coordination of care, and even investment for rural services. It can, however, also mean the loss of rural patients to urban providers and the erosion of local, rural services. Large urban-based systems may be unaware of or insensitive to their impact on rural providers and communities.¹¹

To succeed, rural communities and providers must take charge of their interests and their organizations. They need to create local growth and ensure a local market of health care services—one that can create the leverage needed by rural regions to define their own future—cooperatively with urban partners, or independent of them. Some states have resources and programs available to assist rural communities that want to take up the challenge. For example, Oklahoma’s program is called "Community Strategies," Iowa’s is "Hometown Health," and Arkansas’s is "Community Solutions." Additionally, a National Rural Health Resource Center is being developed to help states and rural communities survive in the new managed care environment. For more information, call the center at (218) 720-0700. These resources, combined with learning from the successful efforts of other rural communities and regions, should help pave the way for the rest of rural America.

One potential outcome is clear—failure to take charge of rural interests and organizations will, in many instances, diminish the probability that rural health care services will survive, and that local economies will thrive.

—Sam M. Cordes, Ph.D., University of Nebraska and Wayne W. Myers, M.D., University of Kentucky

The Capital Area Rural Health Roundtable would like to thank the following individuals for their review of and contribution to this article: Bruce Amundson, Sue Bernstein, Jerry Coopey, Gerald Doeksen, Jo Ann Myers, and Val Schott.

Footnotes

1. Levit, Katharine R., Helen C. Lazenby, Bradley R. Braden, Cathy A. Cowan, Patricia A. McDonnell, Lekha Sivarajan, Jean M. Stiller, Darleen K. Won, Carolyn S. Donham, Anna M. Long, and Madie W. Stewart. "National Health Expenditures, 1995." Health Care Financing Review. 18 (1) Fall 1996: 175-214.

2. Rural Policy Research Institute (RUPRI) estimates, from personal correspondence with Glenn I. Nelson. 1997.

3. Amundson, Bruce. "Myth and Reality in the Rural Health Service Crisis: Facing Up to Community Responsibilities." The Journal of Rural Health. 9(3) Summer 1993: 176-187.

4. Weisgrau, Sheldon. The Economic Impact of NHSC Physicians on Rural Communities. Federal Office of Public Health Policy, USDHHS. 1997

5. Unpublished analysis by the USDA Economic Research Service, based on county-level data from the 1990 U.S. Census and annual averages from the 1996 monthly Current Population Survey (CPS). The 1996 CPS estimate of rural health care employment (2,027,000 persons) was not significantly different from the CPS estimate of rural education employment (2,021,000 persons).

6. Congressional Budget Office. Trends in Health Care Spending by the Private Sector. April 1997.

7. Unpublished data generated by the University of Kentucky Center for Rural Health Community Initiated Decision Making Project.

8. Van Hook, Robert. Rural Community Health Plans: A Survey Report and Directory. Federal Office of Rural Health Policy, USDHHS. 1997

9. Amundson, Bruce. Rural Health Services, Rural Communities and Reform: NRHA and a National Initiative. 1997 (available through the National Rural Health Association).

10. Puskin, Dena. "From the Feds: Medicare and Rural Solvency," Rural Health News, Vol 3, number 2, 1996, pg 2.

11. Amundson, Bruce. Rural Health Services, Rural Communities and Reform: NRHA and a National Initiative. 1997 (available through the National Rural Health Association).

Center for Health Policy Research and Ethics