by Joyce Frieden, Washington Editor, MedPage Today April 22, 2022

Hundreds of rural hospitals are at risk of closing in the coming years, according to a new study, and the reason may be surprising.

“In general, the major cause for the losses at the smallest hospitals were private payers,” study author Harold Miller, MS, president and CEO of the Center for Healthcare Quality and Payment Reform, said in a phone interview. “In some cases, the private payer may have been paying something equivalent to the hospital's cost, but it wasn't paying anything significantly over that,” which is a problem because “if the hospital has uncompensated care from uninsured patients … Even if the private health plan is paying for costs, there's no margin to cover everything else, and what I found in most cases was that they were paying under cost.”

The reason rural hospitals aren't getting higher payments is partly due to difficulties with negotiation, said Miller, “and in some cases, it's just that [insurers] have a standard fee schedule: ‘Here's what we pay.' [That amount] might be plenty or even more than plenty at a big hospital, but it's not enough at a small hospital.”

Miller, who is also an adjunct professor of public policy and management at Carnegie Mellon University in Pittsburgh, studied cost reports from all 4,807 rural and urban hospitals currently open in the U.S., looking at the impact of the pandemic on hospitals' finances; he used data that the hospitals are required to provide to the Medicare program. Miller found that most rural hospitals experienced lower margins on patient services -- either lower profits or larger losses -- during their 2020 fiscal year than during the previous year. “This was most problematic for small rural hospitals,” the study noted.

“The majority of small rural hospitals were losing money on patient services prior to the pandemic, so the lower margins during the initial year of the pandemic pushed them even further into the red,” according to the study. “In contrast, even though larger rural hospitals and urban hospitals also experienced lower margins, most of them continued to generate profits on patient services overall.”

In 2021, according to the financial data from hospitals that had it available, although total charges increased above pre-pandemic levels, “costs increased as much or more than charges, and payments from private payers continued to be lower as a percentage of charges,” the study said. “As a result, patient service margins were still lower in 2021 than in 2019 for most rural hospitals, and small rural hospitals continued to have higher losses on patient services.”

The impact of one of these hospitals closing looms large because they don't just provide hospital services, Miller said. In many rural communities these hospitals “are the health system in their community. There is no urgent care center. There may not even be a primary care practice. Everything is at that hospital … so if the hospital closes, health care is gone.”

The study projects that 200 rural hospitals are at immediate risk of closing because they could be unable to pay for their expenses within 2-3 years. Overall, “600 rural hospitals -- over 30% of all rural hospitals in the country -- are at risk of closing within the next 6 years … Most of the hospitals are located in isolated communities, where closure of the hospital would mean residents could not obtain essential healthcare services without traveling long distances,” according to the study.

“Some people have mistakenly believed that because the total margins of the hospitals improved in 2020 and 2021, the hospitals are actually healthier,” Miller said in an email. “But the increase in the margins was temporary because of the big federal grants, and moreover, costs are now higher than they were before the pandemic and will likely stay that way, so after the pandemic, the margins will drop again. In other words, the day of reckoning for the hospitals that were losing a lot of money was pushed back by the pandemic, but it's still coming.”

Most of the solutions that have been proposed to save rural hospitals won't work, Miller said. For instance, some people have suggested increasing Medicare rates for critical access hospitals, a category that many rural hospitals fall into. Medicare had been paying these hospitals 99% of their costs for taking care of Medicare patients; that percentage was raised to 101% during the pandemic, but is due to go back to 99% once the pandemic ends.

However, even if it stayed at 101%, “a 2% change on less than half of your patients does not fill a 5% or 10% gap” in costs, he said. Even if Medicare rates were raised higher than that, “why is Medicare subsidizing private health plans?” he asked. “If Medicare wanted to pay more and subsidize them, OK, but I'm not sure that's the right solution.”

Instead, “We need to have a different way of paying all hospitals in my opinion, but we really need it for small rural hospitals,” he said. “A small rural hospital does two things. One is it delivers services to patients when they need them. The second thing that it does is it's there in case the patient does need it. We pay for the first, but we don't pay for the second -- we don't pay for the emergency department to be available whenever the patient needs it.”

Therefore, “we need to have a standby capacity payment to pay for the basic fixed costs of having an emergency department and the minimal lab and radiology services, and then you pay a smaller amount per service on top of that … If you think about the fire department, we don't pay the fire department by the fire. We pay them to be there, so that they're available to put out the fire whenever the fire occurs. This is somewhat the same issue.”

Of course, “you have to pay adequately,” he added. “I've found that when you add up all the numbers, the interesting thing is that it's $3 billion nationally to fill the [payment] gap, which is one-tenth of 1% of national health care spending … We could solve this problem for $3 billion a year because these are small hospitals.”

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