Reinventing a hospital

‘If we had to drive to Albuquerque
 or Las Vegas, 
she might not have made it.’

By Alex Kacik

The gulf between rural hospitals’ available beds and daily admissions widens every year, causing providers to scale down. Without help from the government or larger health systems, many more will likely close.

Susan Bailey rushed her mother to Guadalupe County Hospital when she had gastrointestinal bleeding.

Fortunately, the assisted-living center where Bailey’s mother, Lily Vigil, was staying is near the small community hospital in Santa Rosa, N.M., where the 83-year-old woman received a blood transfusion. The hospital, a lifeline for Bailey and the town’s 2,700 residents, has been in critical condition and nearly extinguished—twice.

“She lost a lot of blood. If we had to drive to Albuquerque or Las Vegas, she might not have made it,” Bailey said, explaining that the best alternatives would’ve been a 120-mile drive west to Presbyterian Hospital in Albuquerque or 68 miles north to Alta Vista Regional Hospital in Las Vegas. “I’m so glad we could keep that hospital here. I knew all but one nurse, people who I saw grow up here. I know their families—there’s trust.”

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Her mother also suffers from dementia and visiting an unfamiliar place would have compromised her condition, Bailey added.

Guadalupe County Hospital, like many other rural providers, is Santa Rosa’s economic bedrock, providing about 50 full-time-equivalent jobs and luring businesses, generating an estimated annual economic impact of $10.4 million. The community hospital, which is the only emergency care provider for an 80-mile stretch of busy Interstate 40, offers a glimpse of the struggles that plague rural hospitals and what they need to survive.

It is difficult to recruit physicians and qualified employees to remote areas, which can further drag inpatient admissions amid a declining population. More than 4,420 areas around the country are currently designated as medically underserved by HHS.

Many rural hospitals still predominantly get paid based on the number of services they provide and do not have the capital, financial incentives or flexibility to reach patients before they become ill. Medicare and Medicaid typically cover most of rural providers’ patients, averaging about 55%, and pay less than commercial insurers.

The gulf between rural hospitals’ available beds and daily admissions widens every year, causing the facilities to scale down, repurpose or close. Society is left to grapple with who will step in when communities lose access to care.

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Guadalupe County Hospital, one of the smallest independent non-critical-access hospitals in the nation, is still standing. But it looks a lot different than it did when it opened 66 years ago.

Shaky ground

Rural hospitals on average are only about half full, indicating that providers will have to reduce their number of inpatient beds to remain viable, according to national data compiled from Medicare cost reports by Modern Healthcare Metrics. Occupancy rates in rural hospitals across the country have incrementally decreased since 2006.

The average total occupancy rate for rural hospitals was 52.2% in 2016, which was well above the acute occupancy rate of 37.8%. This suggests that hospital beds are largely underutilized for long-term, lower-acuity care.

Hospitals typically have more beds than they need to accommodate seasonal demand. Using a 75% occupancy benchmark as a healthy level, 55,095 of rural hospitals’ 129,566 acute-care beds, or 42.5%, are surplus.

The numbers were even more stark for critical-access hospitals, which are paid by the CMS at 101% of Medicare cost. Hospitals that have fewer than 25 beds and are at least 35 miles away from another hospital, among other criteria, are eligible for the federal designation.

While their average occupancy rate was 60.5% in 2016, that was more than double their acute occupancy rate of 23.9%. The data indicate that many of these hospitals have turned into glorified skilled-nursing homes that are operating in the red—recording a 3.4% operating loss on average. Their average total profit margin was 1.1%.

It costs an average of $1,916 to operate each bed, outpacing average revenue of $1,852.

“Most facilities need a 3% margin just to be able to buy equipment and make other capital expenditures,” said Derek Pierce, managing director of Nashville-based Healthcare Management Partners, which teamed up with Modern Healthcare in a joint venture to form Modern Healthcare Metrics. “Otherwise, they will continue to slide backwards.”

Many hospitals will have to strike a new balance to meet the changing healthcare needs of their communities, punctuated by the fact that an estimated 68% of critical-access beds are surplus. But as they stave off a vortex of financial headwinds related to declining demand and dwindling reimbursement to remain open, many don’t know where to begin.

Guadalupe County Hospital, like many other rural providers, is Santa Rosa’s economic bedrock.
Photos by Kirk Gittings, RMKM Architects

Slippery slope

Guadalupe County Hospital, one of the smallest independent non-critical-access hospitals in the nation, is still standing. But it looks a lot different than it did when it opened 66 years ago.

The trouble began in the early ’90s, when the county leased the then 16-bed hospital to a for-profit corporation owned by the only two physicians in the town at that time. But when one physician left in 1992 to pursue a fellowship in cardiac medicine, the burden fell on Dr. Charles Young.

After digging the hospital into a financial hole and allegedly running afoul of the Internal Revenue Service and the CMS, Young left the hospital in February 1993 with its equipment, supplies and furniture in tow. After Young left, the hospital’s assets plummeted to $44,514, down from $702,334 in 1992, financial documents show.

While the federal government investigated Young for alleged fraudulent Medicare billing at Guadalupe County Hospital, he was never charged.

At the time, the hospital averaged about 12% occupancy. It lost $353,000 on net revenue of $1 million in 1992 and $147,000 on net revenue of $690,000 the next year, according to financial documents.

After Young left, then-Gov. Bruce King enlisted Presbyterian Healthcare Services and the University of New Mexico to run the hospital on behalf of the county. Staff wrote procedural manuals, set up an accounting system and hired more employees. King’s administration came through with a $90,000 emergency grant to help equip the hospital while Guadalupe County voters passed a sales tax in July 1993 that brought in about $200,000 annually, bolstering reserve funds.

But ultimately, poor management and botched Medicare cost reports drained the hospital and led to its bankruptcy in 1999.

Dr. Randal Brown, who is currently chief of staff at Guadalupe County Hospital, saw the writing on the wall. When management didn’t heed his concerns about the hospital’s financial state, he prepared the documentation to transition the hospital to a not-for-profit entity.

“I knew they were going to fall off a cliff one day and if I didn’t form a not-for-profit corporate structure, they would’ve closed,” Brown said. While the hospital broke even in 1991, its profit margin fell into the red by more than 20% in 1992 and 1993.”

Operating profit margin for rural & urban hospitals

Source: Modern Healthcare Metrics

“I knew they were going to fall off a cliff one day and if I didn’t form a not-for-profit corporate structure, they would’ve closed.”

Dr. Randal Brown
Chief of staff
Guadalupe County Hospital

The county provided Guadalupe County Hospital $50,000 in reserve funds and the city contributed additional funds to cover start-up payroll costs. Brown said he and another doctor worked for free and staff received minimal stipends for more than a year while the hospital rebounded.

Rural hospital closures: 2010 – 2017

Each represents one rural hospital. Size of circle indicates number of beds lost.
Source: The North Carolina Rural Health Research Program

Back from the brink

In 2004, the community hospital caught a break. Hospital administrators found that they had overpaid the government more than $2 million by using the wrong rate in cost reports.

“We were on the verge of closure,” said Christina Campos, Guadalupe’s administrator since 2004. She was chief financial officer from 1993 through 1996. “But this got us over the hump. We had to take the scissors to our hospital and cut and paste it back together.”

Eventually, Guadalupe County Hospital saved enough to build a replacement hospital.

The new building opened in 2011 with only 10 inpatient beds, down from the initial 31, to accommodate the four to six patients who occupied its facility daily, on average. It also had a private primary-care clinic with expanded radiology services and new equipment, a retail pharmacy, the county’s public health clinic and a dental facility.

It has a radiofrequency ablation pain intervention program that reduces dependence on opioids, which is unique to the region. It does not employ traveling or temporary staff and all of its nurses and ancillary and administrative employees are local, thanks to hospital scholarships and partnerships with nearby academic institutions.

Administrators studied utilization trends to determine what services were in demand as well as gaps in care. The hospital looked to regional partners for opportunities to add scale without joining a bigger system.

As a result, Guadalupe has been able to expand outpatient services, improve clinical quality measures and patient experience scores, and stabilize its finances. But first, it had to understand what potential funding sources existed, Campos said.

It used a combination of state and federal support, including the American Recovery and Reinvestment Act and a sole community provider program for disproportionate-share hospital funds. The hospital worked with other regional providers to set up referral networks that offer a broad portfolio of primary-care services and specialties. It also partnered with the University of New Mexico Health Sciences Center’s ACCESS Program to provide telemedicine services for stroke and pediatric patients.

While changing services is often necessary, it’s disruptive not just to a hospital, but local residents. Fear can set in, especially over job losses, as was the case with Mayo Clinic's Albert Lea hospital in Minnesota. Telling the community why the changes are happening and what impact they will have is key, said Campos, who also owns Joseph's Bar & Grill and Annie's Restaurant with her husband in Santa Rosa.

“We are seeing a reduction in beds throughout New Mexico,” she said. “They are having to face those difficult conversations. We learned that you have to actively engage the community and be open and honest.”

It’s still touch and go at Guadalupe, particularly when Congress delays renewing Medicare extenders for low-volume hospitals, but the hospital is on much firmer financial ground.

The National Rural Health Association estimates that about 700 rural hospitals are at risk to close. If that happens, who is responsible for providing care, asked Bret Schroeder, a partner at PA Consulting Group.

“Is the largest hospital in the region responsible for taking care of the community? But what if they can’t make it work financially?” he said. “The question is, what mechanisms are left? Will Medicare or Medicaid step in, or will the burden fall on the state and local government?”

Right-sizing

While Santa Rosa residents are thankful for having one community hospital, a rural area along the Hudson Valley in New York has the luxury of two less than a mile apart.

Kingston, N.Y., is home to about 25,000 residents as well as HealthAlliance of the Hudson Valley’s Mary’s Avenue Hospital and HealthAlliance’s Broadway Hospital, both owned by the Westchester Medical Center Health Network. While Kingstonians enjoyed having two hospitals in town and about 300 beds between them, executives came to realize that it was more of a curse than a blessing.

Even after administrators consolidated all emergency department services at the Broadway facility in 2010, the hospitals were only about half full.

Executives laid out a more comprehensive plan before the community lost both. Westchester is in the process of moving all hospital operations to the Mary’s Avenue campus and transitioning the Broadway campus to a medical village—a medical mall that will house a variety of outpatient services and complementary retail offerings.

Ideally, the medical village will improve patient access and give the city an economic boost, said Joshua Ratner, senior vice president of network strategy at Westchester Medical Center Health Network.

“It’s more important that we have the right services for the community to ensure we have a financially viable hospital rather than hold on to excess beds,” he said.

“It’s more important that we have the right services for the community to ensure we have a financially viable hospital rather than hold on to excess beds.”

Joshua Ratner
Senior vice president of network strategy
Westchester Medical Center Health Network

The Mary’s Avenue campus will have a new, four-story tower that houses more than 200 beds. The facility will also include an imaging center, two inpatient surgical suites, a same-day surgery center, an expanded post-surgery recovery unit, an endoscopy services center and a new birthing facility. The New York State Department of Health approved the $92 million expansion in March.

The New York State Capital Restructuring Financing Program will pay for nearly $89 million of the $133.6 million medical village project on the Broadway campus.

Reduced demand for inpatient beds is a byproduct of better chronic disease management and access to primarycare, Ratner said.

“The challenge is that these hospitals are pillars of the community that haven’t changed in 100 years,” he said. “But they stand on profitable real estate and we don’t want them sitting there dark and crumbling.”

The community was initially concerned when Westchester Medical Center Health Network took control of the two Kingston-based hospitals from HealthAlliance of the Hudson Valley in 2016, said Kingston Mayor Steve Noble. But Noble allayed concerns when he said the consolidation of doctors and other outpatient services would likely increase access and the company’s investment could attract other businesses.

“I didn’t want to see this big vacant shell that happens to hospitals in other towns,” Noble said, as he looked outside his office window at the Broadway hospital emergency room while speaking with Modern Healthcare. “We had an opportunity to retrofit this hospital into more of a community center. We may be combining services and shrinking beds, but jobs are repurposed and we gain these preventative services that could help bend the cost curve.”

Inevitably, rural communities will have to shutter hospital wings or otherwise pare down, said Lyndean Brick, president of the consultancy Advis Group.

“Healthcare doesn’t mean an inpatient bed,” she said. “A hospital gives people peace of mind, but the truth is it may not be the best place to get the care. Hospital leaders have to involve the community as they transition and convey that it doesn’t necessarily mean a loss of jobs, it’s re-imagining what healthcare should be.” But financial incentives cause hospitals to retain beds, even if they are not being used, she added.

Micro-hospitals, which feature a minimum number of inpatient beds and a suite of outpatient and primary-care services, and free-standing emergency departments are replacing many rural hospitals. If rural hospitals maintain their inpatient status, they often have more swing beds, which can offer flexibility but also lower reimbursement.

“I have had more visits to my facility from urban health systems wanting to build a micro-hospital following our model,” Campos said.

But independent free-standing EDs cannot bill Medicare or Medicaid. Private insurers often consider these facilities to be out-of-network. This could slow or halt these transitions, said Joanna Hiatt Kim, the vice president for payment policy at the American Hospital Association.

“No one can make this model work well as of yet,” she said.

Buy or bypass?

Health systems will acquire rural providers if they have the capital and it aligns with their long-term vision.

Irving, Texas-based Christus Health bought Good Shepherd Health System in February 2017.

Good Shepherd includes the 425-bed Good Shepherd Medical Center in Longview, which has about 82,000 residents, and the 149-bed Good Shepherd Medical Center in Marshall, a town of about 24,000, as well as the Good Shepherd Medical Associates physician network, multiple freestanding emergency and trauma centers, and a network of other outpatient sites.

Good Shepherd reported a $37.3 million operating loss in 2017, but has improved to $12.2 million in operating income in the first quarter of 2018 following a series of changes.

The organization hadn’t been able to manage its expenses and was hindered by a fragmented network of around 160 physicians, Christus Good Shepherd CEO Todd Hancock said. It couldn’t invest in its technology and infrastructure for about five years, which hurt morale and increased turnover. Competition also dented volumes.

It’s difficult to recruit and retain qualified workers when rural providers are unable to pay competitive wages or don’t provide professional development opportunities. Ninety of 100 mental health professionals in rural Indiana surveyed said it was difficult to recruit and retain qualified professionals, according to a study from Ball State University.

Christus Health formed teams of administrative and physician leaders to analyze each expense category. It helped save money by bundling services and renegotiating supplier contracts, cutting about 50 jobs, and eliminating redundant or unnecessary clinical procedures. Ultimately, Christus helped Good Shepherd cut out about $40 million in expenses, Hancock said.

Christus was also able to move its specialists in the Tyler area to more rural regions, which helped mitigate the physician shortage. Telemedicine also helped.

Without Christus’ strong telehealth network in neurology, stroke and other service lines, it wouldn’t be able to maintain the core function of its intensive-care unit, Hancock said. It has also increased access to specialty care in rural areas, he said.

“There is a substantial role for telemedicine in the future,” Hancock said.

Moody’s Investors Service recently upgraded Good Shepherd’s rating four notches from Caa1 to Ba3 in April, affecting about $130 million of the system’s debt.

Christus has the capital to speed up its turnaround, the rating’s agency said. The system’s network of hospitals in the region, including Christus Trinity Mother Frances in Tyler, Texas, will allow care coordination that will likely improve Good Shepherd’s market position.

“Because of declining population and the change in care delivery, the economics aren’t there for many communities that were once supported by rural hospitals,” Hancock said. “That doesn’t mean that a creative partnership can’t produce innovative solutions to address core community needs.”

But many systems are reluctant to acquire faltering providers. Struggling hospitals can make poor acquisition targets because they require significant capital investment and can drag balance sheets.

“We will need a huge amount of capital investment to restructure our facilities to be more modern to meet current needs of communities,” said Brock Slabach, senior vice president for member services at the National Rural Healthcare Association. “But not all health systems want to take that on.”

Guadalupe County Hospital, for instance, spent about $15 million on its new hospital.

That’s why the NRHA is focusing its attention on the pending federal infrastructure bill that could give rural hospitals funding to right-size their facilities, Slabach added.

Bigger systems could improve margins at rural hospitals by reducing redundant staff, adding doctors and handling the administrative burden, said Chip Kahn, CEO of the Federation of American Hospitals, which represents the for-profit sector. “But that doesn’t work as well as before,” he said.

Remaining independent

Some rural providers have teamed up to boost their financial performance while maintaining their independence.

TPC is a group of nine independent health systems including 20 hospitals in Texas, Arkansas and Missouri that primarily bundle their purchases to drive savings. It has about $1 billion in purchasing volume, and has achieved around $250 million in savings since 2010, TPC CEO Geoff Brenner said.

“While the advantages of scale are real, about 80% of those can be done without merging,” he said.

Senior executives from each health system meet monthly to discuss the group’s strategy. They have an equal seat at the table, TPC executives said.

The biggest savings stem from the standardization of physician-preference items, such as total joint replacement with the orthopedic surgeons, Brenner said. Physician input also helps the systems improve clinical operations and better manage labor costs, among other benefits, he said.

In addition to purchasing, TPC reduced administrative costs by aggregating revenue-cycle management.

“The financial advantages accrue to individual organizations rather than a central administration that decides what to do,” Brenner said.

One of its members also partnered with a handful of universities and colleges, including Texas Tech University, to establish nursing, public health, physical therapy and pharmacy programs, which could serve as a model for other providers, executives said.

“These independent hospitals need to find some way to gain scale and leverage to offset margin compression and achieve parity with everyone else who is consolidating around them,” Brenner said.

Susan Bailey's mother, Lily Vigil, who received a blood transfusion at Guadalupe County Hospital in April.

Similarly, Guadalupe County Hospital teamed up with nine other hospitals to form the New Mexico Rural Hospital Network, which is predominantly funded by HHS' Network Development Grant.

The participating hospitals bundle purchases, which helps cut costs. It also allows department heads and managers to bounce ideas off a peer network.

Bailey is grateful for programs like these that allow her community hospital to survive.

She could visit her mother every day during her week-long stay at Guadalupe County Hospital, which would have been tough if she had to drive an hour or two out of the way. In fact, Bailey was part of the board that formed the not-for-profit corporation in 1999 that kept the hospital afloat. She felt compelled to help, given how important the hospital was to the community.

“The need for a hospital in this area is great,” Bailey said. “My mother is living proof.”

Transition checklist for rural providers

Assess demographics

Survey your community and region to identify gaps in care or overlap. If there are redundant services, ask other providers to help scale up.

Engage the community

Host town halls, radio shows and other community events to convey the proposed changes. Ask residents what they want and need from a provider.

Verify financial state

Ask a third party to review Medicare cost reports, insurance plans and other finances. If accounting is outsourced, review internally.

Form regional partnerships with other providers

Find other like-minded independent providers in your state and beyond. Ideally, you could bundle purchases to negotiate better rates with suppliers, consolidate revenue-cycle management or boost referral networks.

Talk with larger providers; they have incentives to keep you afloat

Treating low-acuity patients is not the core function of large health systems. They may be willing to extend some of their administrative and management services, telehealth capabilities and other functions that can help keep your doors open.

Explore untapped revenue sources

There’s a range of federal and state funding sources that could serve your hospital. Also look to outsource your real estate management and other non-core services. If you are eliminating a wing at the hospital, see how you could rent out the space to primary-care providers or outpatient services, for instance.

Editors: Matthew Weinstock, Paul Barr and Aurora Aguilar | Copy editors: David May and Julie A. Johnson | Joanne Kim contributed to this project
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