One year later: How CMS' rural pay model has helped hospitals

Friend Community Healthcare System’s hospital was hours from closing its doors in July.

The City of Friend, a community of about 900 people in southeast Nebraska, gave its local hospital, Warren Memorial Hospital, $250,000 to help administrators make payroll and fund operations. But that was only a temporary solution for the 15-bed critical access hospital, which has struggled against bigger competitors in Lincoln and Omaha as it treats an increasing number of Medicaid beneficiaries.

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“Our cash flow got to a point where we were days away from closing, if not hours,” said Jared Chaffin, chief financial officer and interim co-chief executive officer of Friend Community Healthcare System. “But the city did help us, and we started looking into the rural emergency hospital program.”

Warren Memorial, which filed its application in November, is likely days away from becoming the first hospital in the state to convert to a rural emergency hospital.

Sen. Chuck Grassley (R-Iowa), who co-sponsored legislation paving the way for the rural emergency hospital program, hoped it would prevent hospital closures that decimate local economies and force patients to travel farther for care. Nearly 200 rural hospitals have shuttered or converted to outpatient-only facilities since 2005, with nine closing in 2023 alone, according to data from the University of North Carolina.

But only 19 hospitals converted to rural emergency hospitals since the program opened last January. The model, which requires states to pass legislation allowing hospitals to make such a move, marks the first new federal payment program since the critical access hospital designation was introduced in 1997.

The latest model offers rural hospitals a 5% boost to Medicare outpatient reimbursement and an average facility fee payment of more than $3.2 million a year.

But the rural emergency hospital program has trade-offs.

Rural emergency hospitals cannot provide inpatient care, potentially requiring those facilities to transfer more patients. Critical access hospitals that convert forgo a reimbursement model that pays for all of their costs to provide patient care. Those hospitals also give up swing beds, where inpatient beds switch to skilled nursing beds for long-term patients. Rural emergency hospitals may have trouble recruiting physicians and nurses who specialize in acute care, as well.

In addition, converted hospitals lose 340B drug discount savings from a program that allows those serving a disproportionate share of low-income patients to save an estimated 25% to 50% on outpatient drugs.

The loss of 340B and swing bed programs, which are often financial drivers for rural hospitals, has been the biggest impediments for those considering the new model.

Despite those trade-offs, opting to convert was a “no-brainer,” Chaffin said. The $3.2 million cash infusion would account for roughly 70% of Friend Community’s annual revenue, and only a fraction of its 3.2 average daily patients as of Sept. 30 were acute patients, he said.

Friend Community would use some of the money tied to the new program to add outpatient and social services, invest in an infusion clinic, update equipment and revamp its operating room, Chaffin said.

“Outpatient services are going to be what truly saves our hospital,” he said. “If our hospital closes, this town will an lose emergency room, which is the main priority for the vast majority of people in this community. We strongly believe if our ER goes away, there will be a death in this community.”

Still, some industry observers see the relatively slow uptake as a sign that the rural emergency hospital program will attract few participants.

“The rural emergency hospital program is based on [the] myth [that] the reason hospitals are losing money is because they are forced to deliver inpatient care,” said Harold Miller, president and CEO of the Center for Healthcare Quality and Payment Reform. “There are a few hospitals where it doesn’t make sense to maintain inpatient care, but not the vast majority. The biggest problem is that rural hospitals are losing money on emergency and primary care because they are underpaid by private health plans.”

Researchers' estimates vary on how many of the country’s more than 1,500 rural hospitals will ultimately convert. A 2021 research brief from UNC's North Carolina Rural Health Research Program predicted about 68 conversions. An updated research brief from UNC published in October 2022 identified 356 hospitals eligible for the program that may convert based on their negative margins, average daily patient volumes of less than three people admitted to the hospital and a net patient revenue—patient revenue minus contractual allowances and discounts—of less than $20 million.

Other researchers, like Dr. Andrew Ibrahim, co-director of University of Michigan’s Center for Healthcare Outcomes and Policy, expect up to 700 rural hospitals to convert.

“Some early adopters were going to close and the rural emergency hospital program was a Hail Mary,” Ibrahim said. “But there is another wave of hospitals that are going to thoughtfully think about pros and cons and will take a little more time.”

Pocahontas, Arkansas-based St. Bernards Five Rivers Medical Center, a 50-bed hospital in northeastern Arkansas, was the state’s first hospital to convert in September.

A fraction of the hospital’s five average daily patients receive acute care, meaning daily operations largely did not change after converting, said Administrator Randy Barymon. Also, its 340B savings are small and there are two nearby nursing homes that could treat St. Bernards Five Rivers’ post-acute patients, he said.

“Making the decision to not have inpatient care was a big decision, but it wasn’t sustainable if we kept things status quo,” Barymon said.

The rural emergency hospital program will allow St. Bernards Five Rivers to grow its outpatient services, such as pain management and gastrointestinal services, upgrade equipment and bolster its revenue cycle management, he added.

But the hospital's decision would’ve been easier if it could still participate in 340B, he said.

Barymon's sentiment mirrors the observations of many other rural hospital operators, who claim rural emergency hospital conversions would increase if those facilities could keep their 340B savings and some inpatient and swing beds. But since the Centers for Medicare and Medicaid Services said it doesn’t have the statutory authority to make such changes, Congress would have to pass another law.

“If we can get swing beds in the mix with rural emergency hospitals, we will see a significant increase in conversion across the country,” said Jed Hansen, executive director of the Nebraska Rural Health Association.

Five other Nebraska critical access hospitals are also considering converting, he said.

Chaffin and Amy Thimm, a registered nurse at Friend Community and vice president of clinical services and quality, have received a handful of emails from health system CEOs asking about the rural emergency hospital program, they said.

“We are in the spotlight for multiple hospitals to see how this goes,” Chaffin said.