For many rural hospitals, new payment model doesn’t add up

Winston Medical Center treats about three acute-care patients a day in its 14-bed hospital.

In theory, the Louisville, Mississippi-based facility should be an ideal candidate to convert to the rural emergency hospital model, which as of Jan. 1 gives a reimbursement boost and an operating bonus to hospitals that eliminate inpatient services and provide 24-hour emergency care.

But Paul Black, chief financial officer, said the incentives aren’t enough. Winston Medical would have to get rid of its 10-bed geriatric psychiatric unit and lose the associated revenue and referrals—meaning most patients would have to travel more than 30 miles to the nearest inpatient psychiatric facility.

The $272,866 monthly facility fee offered by the Centers for Medicare and Medicaid Services would also not cover Winston Medical’s 24-hour emergency physician staffing costs, Black said. The hospital treats about 24 patients in its emergency department a day; considering the $175 hourly wage for emergency physicians, it would need to treat 72 patients daily to break even.

The hospital projects an $800,000 loss in 2023. It would face an even larger one if the hospital converted, Black said.

“I don’t think the rural emergency hospital program is beneficial for us,” Black said. “I haven’t been able to run the numbers and make it look good enough to convert.”

The rural emergency hospital is the first new federal payment program since the critical-access hospital model was introduced in 1997.

Sen. Chuck Grassley (R-Iowa), who co-sponsored legislation leading to the new program’s creation, hoped it would stave off hospital closures that decimate local economies and force patients to travel farther for care. Around 140 rural hospitals have shuttered or converted to outpatient-only facilities over the past 12 years, with more than 40 closing since 2019, according to data from the University of North Carolina.

Under the CMS 2023 Outpatient Prospective Payment System final rule issued in November outlining the model’s specifics, rural emergency hospitals would eliminate their inpatient beds in exchange for a 5% boost to Medicare outpatient reimbursement and an average facility fee payment of $3.3 million a year.

Converted hospitals must always have a clinician on call, staff their emergency departments 24 hours a day, implement a quality assurance and performance improvement program, have a per-patient average length of stay under 24 hours and maintain an infection prevention program. States must also pass laws to register and license the converted facilities.

Kansas, Nebraska and South Dakota have passed such laws allowing hospitals to convert. As of last week, a handful of Texas hospitals hoping to transition were waiting for Gov. Greg Abbott (R) to implement emergency rulemaking to expedite the process.

Rural hospitals with fewer than 50 beds that were enrolled in Medicare as of Dec. 27, 2020, are eligible, totaling about 1,400 facilities around the country. But a 2021 brief from the North Carolina Rural Health Research Program predicted about 68 conversions. The number has likely dropped, industry observers said.

The program’s appeal has been limited by the prospect of losing 340B drug discount revenue and swing beds, along with concern regarding community perception of eliminating inpatient services.

“The final version of the legislation offers a lifeline for a very limited class of hospitals,” said Travis Lloyd, a healthcare attorney for law firm Bass Berry & Sims who specializes in healthcare regulatory issues. “It is not the broad-based antidote that rural hospitals need to alter the trajectory of closures.”

Before CMS issued its final rule, rural hospitals hoped the agency would include provisions allowing them to maintain their revenue under the 340B program, which enables some hospitals that serve low-income communities to purchase outpatient drugs at a significant discount. The agency said in the final rule it doesn’t have the statutory authority to include those provisions, meaning Congress would have to pass another law. Critical-access hospitals that convert would also have to sacrifice their cost-based reimbursement.

Brock Slabach, chief operations officer for the National Rural Health Association, pointed to the 340B ineligibility as the main problem preventing many hospitals from converting.

In a 2020 survey from the advocacy organization 340B Health, three-quarters of critical-access hospitals reported the program helped them keep their doors open on an ongoing basis, with median yearly savings of $564,000. Respondents said the program helped them improve medication adherence, support uncompensated care and fund telehealth and oncology services.

“Our critical-access hospitals in Nebraska see 340B as a lifeline,” said Jeremy Nordquist, president of the Nebraska Hospital Association. “It supports everything from community outreach and prevention to equipment purchases.”

Nebraska has 92 hospitals, including 63 critical-access hospitals that would have to forgo their cost-based reimbursement and 340B reimbursement to convert. As of now, none of the 92 plan to do so, Nordquist said.

Many hospitals also wanted CMS to permit them to keep their swing beds and other ancillary services under the new model. Swing beds allow hospitals to provide acute or skilled-nursing care as needed—a growing concern as staffing shortages and other financial issues create bottlenecks at post-acute facilities.

“Hospitals have had huge issues discharging patients to nursing homes, as many have closed across [Nebraska],” Nordquist said.

A mid-December survey coordinated by the association found 232 patients in Nebraska hospitals who had waited more than seven days to be discharged to a post-acute facility.

“The swing bed is such a community asset when there is not another place in town for nursing care,” Nordquist said.

CMS in its November final rule said swing beds were outside the scope of the rural emergency hospital legislation.

The rule did have some good news regarding rural hospitals’ provider-based outpatient clinics, which would have likely seen payments decrease under the new model. The agency clarified those clinics will be able to maintain their cost-based reimbursement if they were established before April 2021.

Rural hospital operators and industry observers say the financial incentives offered under the rural emergency hospital designation may be less enticing than anticipated, considering a funding boost through a recent congressional spending bill and the uncertainty associated with future rate increases. It’s unclear, too, whether facilities would be able to convert back to a traditional hospital if necessary.

The $1.7 trillion spending bill passed in December included a two-year extension of an add-on Medicare payment adjustment of up to 25% per discharge for low-volume hospitals. It also implemented a 2% cut for Medicare rates to doctors in 2023—down from the 4.5% rate originally proposed—and extended telehealth flexibilities. Such provisions are expected to reduce the urgency for hospitals to ax their inpatient operations.

“I know a lot of hospitals that were holding their breath to see if those continued to get extended. These inpatient payments can make or break them,” said Dan Schoenbaechler, senior manager of healthcare consulting at the consultancy LBMC. “The rural emergency hospital is something the rural hospitals will consider, but I expect fewer to convert now since the low-volume adjustment was extended.”

Hospital operators are also worried the monthly facility fee payment, which will rise based on the annual hospital market basket increases but will be subject to Medicare cuts known as sequestration, may not keep up with their expenses. The anxiety looms particularly large as providers grapple with inflation and ongoing labor issues.

The hospitals that still seem interested in converting are those with an average daily inpatient census of fewer than two and those that aren’t eligible for the 340B program, Lloyd said.

“But it’s not just dollars and cents,” he said. “There’s also the emotional reaction that hospitals face when they stop providing inpatient care. Those are big factors as to why I haven’t seen a lot of activity and interest.”

Guadalupe County Hospital in New Mexico plans to convert to a rural emergency hospital as soon as possible. But it pointed to the local response as a potential complicating factor.

Last year, it saw fewer than one person daily, on average, for inpatient services. Without the rural emergency hospital program, Guadalupe would have an estimated $1.1 million loss through the first five months of its 2023 fiscal year. The facility fee payment under the new model would allow it to break even, administrator Christina Campos said.

“We realized that our census is too low to continue as a prospective payment system hospital,” she said. “The big thing we have to manage is the community perception and letting folks know that people will still be able to stay here overnight under observation.”

Ideally, CMS would have allowed some inpatient visits at rural emergency hospitals to mitigate the community’s concern, said Nathan Staggs, CEO of Anson General Hospital, a 45-bed hospital near Abilene, Texas. It’s one of three hospitals in the state planning to immediately convert to a rural emergency hospital.

“The biggest challenge we faced is with the board and community’s mental aspect of not having inpatient care,” Staggs said.

The limited reach of the rural emergency hospital program will mean community hospitals must explore other options to become financially stable, such as merging with larger systems or petitioning for less onerous regulatory requirements.

The 32-bed Bellville Medical Center in southeastern Texas had been considering making the transition to the rural emergency hospital model, CEO Daniel Bonk told Modern Healthcare in August when CMS unveiled the preliminary payment methodology. But it has since instead agreed to merge with MidCoast Health System, a four-hospital system in Central Texas and the Gulf Coast, a facility spokesperson said.

Other hospitals may have to cut services or close in the face of higher labor and supply costs and reimbursement cuts.

Industry observers warn that without significant policy changes across the board, rural residents will have to travel farther for care. Nearly one-third of the nation’s rural hospitals are at risk of shuttering, according to a 2022 study by the Center for Healthcare Quality and Payment Reform. More than 200 of the 600 at-risk hospitals could close within three years.

In response, hospital operators and associations are lobbying for increased state Medicaid funding for behavioral healthcare; boosted Medicaid payments for rural obstetric providers; expedited state Medicaid payments to rural hospitals; incentives for more nurse training programs in rural areas and relaxed requirements to participate in the critical-access hospital program. They are also pushing for payment increases for Medicare-dependent and low-volume hospitals.

Expanding Medicaid eligibility would make the biggest impact for Winston Medical and other rural hospitals in Mississippi, but state policymakers have long rejected the proposal, Black said.

“What is going to have to happen is we have four or five hospitals close at the same time, then maybe something will change,” he said.