For years, administrators at Avera Weskota Memorial Medical Center in South Dakota tried any number of strategies and interventions to strengthen the small, rural hospital's poor financial position.
The 25-bed acute-care facility in the sparsely populated agricultural community of Wessington Springs, about 90 miles southeast of the state capital of Pierre, was struggling constantly to stay in the black because of low inpatient volume. Although hospital administrators were running the operation frugally enough to keep the facility open, little money was left to reinvest in capital improvements like technology and diagnostic equipment upgrades and workforce initiatives. When inpatient DRGs began to dwindle in 2001, Avera Weskota found itself $100,000 in the red in its fiscal 2002.
"As we got into lower volumes, we just didn't have enough inpatients to stabilize the financials," says hospital Chief Executive Officer Kayleen Lee. She says Avera Weskota, the community's largest employer, is on the road to long-term financial health today after becoming a critical-access hospital in October 2001 and posting a $150,000 profit in fiscal 2003, ended June 30. She says she is confident the hospital will have a positive bottom line again this year.
Federally designated, limited-service critical-access hospitals located in rural areas receive cost-based reimbursement from Medicare rather than prospective payments. To be certified by the CMS as a critical-access hospital, a facility must, among other requirements, be in a rural area and located more than a 35-mile drive from another hospital or healthcare facility or be certified by the state with CMS verification as being a "necessary provider."
"Choosing critical-access (designation) has made all the difference by ending a long run of red ink and losing money," Lee says. "It has helped us get better reimbursement to really do what the critical-access program was meant to do, which is to improve quality of services so that people don't have to go out of town."
Nearly 55 miles from Avera Queen of Peace Hospital in Mitchell, S.D., and another 40 miles from Huron (S.D.) Regional Medical Center, Avera Weskota's presence is vital to a community where farming and highway accidents--a major interstate runs through Wessington Springs--demand the availability of immediate medical attention.
Critical-access dollars recently allowed the hospital to purchase its first ultrasound machine as part of an initiative to update diagnostic imaging equipment. Avera Weskota also received a $19,700 workforce development grant through the Medicare Rural Hospital Flexibility Program--which offers grants to states to help strengthen rural healthcare infrastructure--to train and recruit qualified employees for the community, including radiology technicians needed to support the new equipment.
"We finally have the financial security that allows us to upgrade our services, equipment and facility so that we can provide quality care," Lee says.
Resuscitating rural hospitals
As their name suggests, the 893 hospitals in the federal government's critical-access facility program deliver essential healthcare services to rural residents and communities that otherwise wouldn't have access to healthcare. Enacted by the Balanced Budget Act of 1997, which allowed cost-based payments for outpatient and acute inpatient services for small rural hospitals that chose critical-access status, the program has helped rural communities focus on health outcomes by dramatically changing the hospitals' financial status and strengthening the facilities for long-term survival.
"Almost 900 communities have made this decision and it's allowed them the resources to address quality concerns," says Marcia Brand, director of the Office of Rural Health Policy at HHS' Health Resources and Services Administration, or HRSA. The critical-access program was built upon a demonstration project introduced in the early 1990s known as the Essential Access Community Hospital/Rural Primary Care Hospital program, which included mostly Midwestern hospitals. Since its official launch in 1997, the critical-access program has attracted hospitals with a low average daily census. But recent program changes under the 2003 Medicare reform law--expanding hospitals' eligibility for critical-access status and the higher reimbursement that accompanies the designation--are ushering in a wave of new critical-access conversions nationwide.
Retroactive to Jan. 1, 2004, hospitals with up to 25 acute-care beds can now qualify for the program. The previous limit was 15 beds, which often posed a dilemma for administrators at small rural hospitals with a daily census that slightly exceeded the 15-bed limit by forcing them to choose whether to sacrifice some of a facility's acute-care beds to gain cost-based reimbursement. The CMS' new parameters give more hospitals the incentive to convert if the cost of caring for Medicare patients exceeds Medicare's prospective payment system rates.
"Oftentimes we hear stories about federal programs with questionable results, but the critical-access program is one of the great success stories, especially at the local level," says Alan Morgan, vice president of government affairs and policy for the National Rural Health Association. "Hospitals that are on the verge of closing their doors are converting to the critical-access designation, upgrading their infrastructures, building new facilities and instituting a lot of very creative networking and outreach efforts in the community."
The nearly 900 critical-access hospitals in operation represent more than 15% of U.S. hospitals and almost 40% of rural hospitals. Federal officials contend the number is expected to rise to nearly 1,600 in the next few years as more facilities convert and payments to critical-access hospitals increase by up to $900 million over the next 10 years because of the changes.
Boosting the bottom line
Recent reports issued on the facilities' financial performance offer the first glimpse of the benefits of the program, which grew rapidly after Congress added benefits for the hospitals with the Balanced Budget Refinement Act of 1999 and the Benefits Improvement and Protection Act in 2000. The small rural hospitals that converted to critical-access status in fiscal 1999 experienced an average increase in Medicare inpatient and outpatient payments that exceeded $500,000 in fiscal 2000 inflation-adjusted dollars, according to an analysis by Jeffrey Stensland of Project HOPE and Gestur Davidson and Ira Moscovice at the University of Minnesota's Rural Health Research Center.
Hospitals that converted in 1999 saw their total profit margins reach an average of 2.3% one year after conversion and 3.7% two years after conversion, and most can now afford capital improvements, Stensland and his research colleagues found. For rural hospitals that converted to critical-access in 2000, profit margins increased from a mean of 0% to 2% after conversion, and margins are expected to grow further as the hospitals adjust their operations to maximize profitability under the new Medicare payment structure, according to Stensland.
The HRSA's Brand says that by converting to critical-access status, a small rural hospital can expect its bottom line to improve by about $180,00 in its first year.
"When we're talking about Medicare resources, that sounds like a little bit of money," she says. "But it's substantial for a small hospital," often the difference between profit and loss.
Rachael Sherard, executive director of the Sioux Falls, S.D.-based Avera Rural Health Institute, which offers strategic planning and grant-writing assistance for local providers, says that small rural hospitals in South Dakota and nationwide will still be jockeying for federal grant dollars and any additional financial assistance they can get.
Although rural providers nationwide won a number of concessions in the Medicare reform law--including payment for both inpatient and outpatient services that was increased from 100% of reasonable costs to 101%--President Bush's 2005 budget blueprint takes a 70% bite out of rural health programs administered by the HRSA. Rural health outreach grants would be reduced to $11 million in fiscal 2005 under Bush's plan from $40 million in fiscal 2004, and the budget also would eliminate HRSA funding for public health improvement projects and the federal Rural Hospital Flexibility Program, which provides funding to state governments to strengthen rural health.
"Although the flex program didn't get included in the president's budget, our understanding is that there's support for it in the administration," says Terry Hill, director of the Rural Health Resource Center in Duluth, Minn. The not-for-profit organization provides technical assistance, information and resources for the improvement of rural healthcare.
In South Dakota, nine Avera-affiliated hospitals are among those receiving grants through the flex program. A total of $650,000 has been given to South Dakota hospitals to enhance information systems, strengthen emergency services and increase staff training and education, Sherard says.
"That money is so important even if it's a $15,000 or $30,000 grant," she says. "These cost-based critical-access facilities are not always making the money to do infrastructure improvement."
Hill says that states are seeing a major trend of hospitals using the flex funding for quality improvement and patient-safety initiatives. Alaska's roughly 10 critical-access facilities used funding to create a performance improvement network while Montana's 36 critical-access hospitals formed a quality network, he says.
"We're working on a project to use balanced score cards that a lot of bigger hospital systems have used," Hill says. "Hundreds of rural facilities nationally are looking at this."
The HRSA's Brand says it's imperative that healthcare services offered in rural communities are appropriate and that the quality is just as good as what patients might find at a regional or urban-area hospital.
"You don't want outmigration," she says.
Keeping patients in town
Losing patients was a chief concern at Valdez (Alaska) Community Hospital, which was so unappealing structurally that many residents in the remote community at the southern base of the trans-Alaska oil pipeline preferred to board a plane and travel 120 miles to Anchorage for healthcare.
"The current building looks like a World War II bunker," says Jim Culley, CEO of the Valdez Regional Health Authority, which consists of Valdez Counseling Center and the partially shuttered 15-bed Valdez Community Hospital. "It's horribly inefficient," he says of the facility, which shifted to the critical-access designation in August 2001 and has been operating with boarded doors and windows in some of its old wings and hallways.
After the city of Valdez was devastated by a massive earthquake in 1964, the Army Corps of Engineers condemned, moved and rebuilt the entire town including the state's Harborview Development Center, which served the developmentally disabled and later became the critical-access hospital. In 1997, the state began the process of shutting down Harborview but was unable to reach an agreement with the city of Valdez to relocate another business to the nearly empty facility. With an average of just more than one acute-care patient per day and 30 to 40 babies born there each year, Valdez Community posted total operating revenue of about $4.1 million in 2002 while operating expenses were more than $5 million, leaving the hospital with a loss of $827,000. In 2003, total operating expenses of $5.2 million exceeded operating revenue of nearly $4.7 million.
"Without critical-access designation, I doubt if we could have continued," Culley says, adding the hospital's budget shortfall has also been shored up by funding from the city both before and even after the facility converted to critical-access status. In 2002, the city of Valdez contributed $899,000 to address the hospital's budget shortfall and $923,000 in 2003.
Culley and local leaders are hoping a new 69,000-square-foot critical-access hospital for the port city of Valdez will boost patient volume with more advanced and accessible care. Opening this July, the $26 million, 25-bed facility is being built by architectural firm Prochaska & Associates, which specializes in rural and remote healthcare projects. The hospital will serve 7,000 people in a 25,000-square-mile area.
"Valdez is absolutely dependent upon maintaining a sustainable hospital for its future economic development and its ability to retain and recruit professionals," says the firm's president, Don Prochaska. "These people see a gray, earthquake-era Army Corps of Engineers building and they drive past it to fly to Anchorage. If you saw it, you would have turned and run, even if both legs were broken."
The NRHA's Morgan says a substantial number of the nation's old Hill-Burton era hospitals--facilities built under a massive post-World War II hospital construction program--have problems with capacity. "They've got great clinical staff but just because of the sight of building, it drives away patients," he says.
For critical-access hospitals like Valdez Community that have been retrofitted as much as possible, the HRSA's Brand says her office is pushing financing opportunities through the Federal Housing Administration's Section 242 hospital mortgage insurance program. The program is also being promoted by the U.S. Housing and Urban Development Department, which has streamlined its application process to make it easier for critical-access hospitals to qualify by enabling facilities to lower the interest rates on their debt (Sept. 30, 2002, p. 14).
Brand says three critical-access hospitals are now using the program and the HRSA is hoping others will use the financing mechanism as a resource. For rural communities looking to demolish their outdated facilities and rebuild, the HRSA could offer future technical assistance with planning and design for hospitals that come up with the capital. The Office of Rural Health Policy has been investigating the creation of an overarching framework or prototype for what a new 25-bed critical-access hospital would look like, she says.
Prochaska adds that rural healthcare and the replacement of critical-access hospitals require that rural hospital administrators consider more than just the issue of finance when debating whether to close existing outdated rural facilities.
"Everyone is focusing on the dollars instead of the market," he says. "The question should not be how are we going to finance, but what do we need here? It's about unmet markets and attitudes toward healthcare."
Before deciding to rebuild Valdez Community, the city was considering closing the facility altogether and "literally stationing a jet on the end of the runway" to fly residents elsewhere to get care, Prochaska says. Residents had grown to accept that living remotely meant giving up immediate access to good healthcare, he says.
Time to shed beds?
With greater recognition of the critical-access program, an increasing number of rural hospital operators nationwide are considering whether to convert, particularly 25- to 50-bed facilities that have low volume and a high proportion of Medicare patients.
"Everyone wants to go critical access it seems," says Prochaska, whose firm is currently assisting with five feasibility studies for both small and large hospitals weighing conversion in Alaska and others in Nebraska and Iowa. "For a community of 2,500 people in the middle of Iowa, it means $300,000 to $400,000 added to the bottom line and it means they can recruit another couple physician assistants or physicians into town."
At 67-bed Jefferson County Hospital in Fairfield, Iowa, CEO Ralph Paulding says the decision to convert was clear. The hospital posted operating losses in fiscal 2002 and 2003 of $496,000 and $640,000, respectively, before receiving more than $780,000 in tax subsidies both years from the county. A feasibility study determined that if the hospital had been operating as a critical-access facility for those fiscal years, it would have gained an additional $690,000 from cost-based reimbursement in fiscal 2002 and more than $2 million in fiscal 2003. Paulding says the hospital last month won its petition from Iowa's certificate-of-need board to create a distinct 36-bed nursing facility and is awaiting a decision on its second petition to decertify six of the hospital's remaining 31 acute-care beds so it can qualify to convert.
"The critical-access program was developed to save desperate small rural hospitals struggling to keep their doors open and now it's become a business strategy to optimize reimbursement potentials," Paulding says.
While the critical-access designation has dramatically altered the financial picture of rural hospitals, the program hasn't been a cure-all for every provider, says Jim Breckenridge, senior vice president of finance at Avera Health.
"We have a number of facilities in South Dakota where it's not uncommon to run about 80% to 85% Medicare utilization," he says. "While the critical-access designation gives you cost-based reimbursement, it doesn't give you profit. So if you don't have volume, you can't make a profit to reinvest capital."
Breckenridge says the critical-access facilities that are doing well financially are free-standing hospitals without attached long-term-care facilities that require additional financial resources.
But the HRSA's Brand says the opportunity to convert to critical-access status gives many rural facilities the ability to carry out long-term strategic planning now that their financial position is improving.
"For years these facilities have struggled so hard to meet payroll and to just survive," she says, adding that now they're in a position to do more than just survive.
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