Saving Rural Hospitals

The overarching problem is that Medicare’s finances are now a zero sum game.

Hospitals face huge challenges in the coming decade. Declining inpatient admissions will erode their principal source of revenue. Borrowing costs are rising, even for profitable hospitals; those with weak balance sheets are already shut out of capital markets. Under the Patient Protection and Affordable Care Act (ACA) or Obamacare, hospitals must meet unprecedented performance standards or face stiff payment penalties. Through payment carrots and sticks, the Act will push hospitals to meet unparalleled performance standards in a historic push to transform care delivery.

Moreover, ACA implementation occurs at a time of painful federal deficit reduction; whether through annual sequestration’s across-the-board reductions in Medicare payments or through Congressional adoption of long-term Medicare and Medicaid cost reduction strategies, a new layer of hospital revenue must be ground away in every federal budget cycle.

The largest, wealthiest health care systems and community hospitals will be hard pressed to meet these challenges. But for smaller, rural hospitals, the circumstances are dire. Hundreds of rural hospitals have closed during the past two decades. Of the remaining rural hospitals, four out of five are losing money — including almost all of the Critical Access and Medicare Dependent hospitals that receive incrementally higher Medicare payments.  Small hospitals’ endowments are modest at best, and the communities they serve can’t bail them out. In fact, for an affected community, losing its only hospital — generally its largest employer — is an unequivocal calamity.

Those in Congress and state capitals who represent the nearly 60 million Americans in our rural communities are beginning to realize the seriousness of the threat. Unless timely action is taken in Washington, the ACA’s costly regulations and looming Medicare payment reductions will doom scores of rural hospitals. In the face of millions of Americans at risk of losing local access to health care services, political odd couples like Democratic Sen. Chuck Schumer of New York and Republican Sen. Chuck Grassley of Iowa, are beginning to work together.

The overarching problem is that Medicare’s finances are now a zero sum game. At the current trajectory of costs and tax revenues, the Medicare Trust Fund will be out of money for benefits no later than 2023. Going forward, any increase in Medicare costs must be offset through higher taxes, provider reimbursement cuts or benefits reductions. Saving rural hospitals means taking away money from someone else. The obvious candidates for are the large, rich nonprofit hospitals.

Recently released data about Medicare payments to individual hospitals points out what health care industry experts have long known. The most profitable hospital systems have used politics, advertising, and sheer aggression to create virtual regional monopolies and leverage reimbursement rates that are two or three times higher than those paid to smaller hospitals. Notwithstanding higher reimbursements, Medicare and commercial payment data show risk-adjusted patient outcomes at larger institutions are no better, sometimes worse, than at smaller hospitals. In other words, there is no objective justification for the large differences in payments to large hospitals and systems.

The growth of huge multi-hospital systems has arguably been the biggest change in our health care system of the past 20 years. A select group of large, profitable, nonprofit hospitals built multi-billion dollar hospital conglomerates that today dominate most regional health care markets. Operating margins above 10 percent fueled continuous expansion: purchasing thousands of physician practices; building new hospitals to drive competing institutions out of business; salaries, jets, and other perks for senior executives and superstar physicians. When Medicare and commercial payers tried to cap payments to these large institutions, they created new revenue streams: e.g., overnight “observation” stays in hospitals that preserve revenue, avoid Medicare audits, and saddle Medicare beneficiaries with 20 perecent co-pays; new “facility charges,” added to doctors’ treatment charges for patient care delivered in a hospital-owned office building.

In spite of postponement of the ACA’s employer coverage mandate, many expect hospital revenue to grow as more Americans are insured under the ACA. Also, Medicaid expansion in some states will help rural and urban safety net hospitals that serve disproportionately large numbers of poor and uninsured patients. But it won’t be enough to offset coming cuts. Sequestration will subtract $11 billion from nonprofit health care providers in the current federal fiscal year, and succeeding fiscal years will see either more sequestration or sweeping reforms that slash costs.

Even as it cuts, Congress must set priorities that reflect Americans’ health care needs. In order to save health care access for tens of millions who depend on thousands of rural hospitals, outsized payments paid to the largest, most profitable health care systems must be reduced to reasonable levels.