The community hospital survival guide: Strategies to keep the doors open

The healthcare industry has not been kind to community hospitals over the past several years, and there is no indication that the industry will be any less cruel on these organizations during the next several years. Survival in this world will take decisive and creative action.

Community hospitals across the nation are facing a myriad of financial challenges, causing some facilities to file for bankruptcy or close their doors for good.

The financial struggles are apparent, as 50 rural hospitals have closed since 2010 — and many more may be headed down the same path. There are 283 rural hospitals across 39 states vulnerable to closure, according to a report from iVantage Health Analytics, a firm that compiles a hospital strength index based on nine pillars of strength. In 2013, more than one-third of rural hospitals were operating at a deficit, according to the National Rural Health Association.

Community hospital leaders are concerned about the future of their facilities. In fact, financial challenges ranked No. 1 — above healthcare reform and patient safety and quality — on the list of community hospital CEOs' top concerns, according to the American College of Healthcare Executives' 2014 survey of top issues confronting hospitals, which included responses from 338 community hospital CEOs.

Although all community hospitals are feeling the squeeze, facilities in states that have not expanded Medicaid are under more financial pressure. In expansion states, 8.5 percent of rural hospitals are vulnerable to closure, and that number is nearly doubled in nonexpansion states, where 16.5 percent of rural hospitals are vulnerable to closure, according to the iVantage report.

"Community hospitals tend to have a higher proportion of Medicaid and indigent patients than suburban hospitals," says Greg Charleston, senior managing director of financial advisory firm Conway MacKenzie and leader of its Healthcare Advisory Services Group.

Medicaid expansion was originally mandatory under the Patient Protection and Affordable Care Act, but a 2012 U.S. Supreme Court decision made it optional. As of May 26, 30 states had expanded Medicaid, including Washington, D.C., three were discussing or considering expansion, and 18 states were not adopting Medicaid expansion at the time, according to Kaiser Health Facts.

"Most of the southeast states have elected not to expand Medicaid, and this has been hard on community hospitals," says Mr. Charleston. He specifically identified Georgia as one state that has experienced a significant amount of stress. "In the state of Georgia…four hospitals have closed in the last two years and at least 15 more community hospitals are in financial distress," says Mr. Charleston.

Along with states not expanding Medicaid, there are various other drivers behind the financial struggles community hospitals face. The issues these facilities are encountering must be overcome, as community hospitals are important pillars in the markets they serve.

Challenge 1: Decreasing patient volume
Some financially distressed community hospitals face fiscal challenges due to fewer patients coming to their facilities for care, and that has captured the attention of hospital leaders. In the annual American College of Healthcare Executives survey, 63 percent of community hospital CEOs said decreasing inpatient volume was one of their top financial concerns.

Various factors influence patient volume across the nation, including health reform and the increasing popularity of high-deductible health plans that cause some people to utilize less healthcare services or delay care because they have such a high financial burden. Along with these issues, community hospitals also face another threat — patient outmigration to larger population centers.

Addressing the problem of declining patient volumes
Community hospitals need to do a deeper dive into their dwindling patient numbers. "They need to determine if their market is shrinking or whether they are losing patients to competitors," says Kelly Arduino, a partner in Wipfli's healthcare practice. Many community hospitals just assume patients will come to them, but that is not the case. Ms. Arduino says these hospitals need to understand that "they need to do more than put a billboard up about their new doctor."

The need for community hospitals to make their presence known is becoming increasingly important as bigger systems improve efficiency and cost of health services. "Health systems are becoming larger, more sophisticated and more competitive," says Mr. Charleston. "The larger systems are using marketing, technology, economies of scale and other methods to deliver better services less expensively. Larger systems draw patients from rural areas for acute treatment, leaving the community hospitals primarily with emergency and urgent care patients."

Although smaller hospitals are having trouble keeping up with larger systems' efficiency, community hospitals should not make any assumptions as to why patients head elsewhere for care, as there are a number of reasons community members may stray from the hospital. "It may be a matter of reputation," says Ms. Arduino. "It could be as simple as someone got a bad bill and talked about it all over town." To solve this problem, Ms. Arduino recommends hospitals use a community engagement survey to find out what local residents really think.

Patients also leave their community for care when the local hospital is disenfranchised with its market. Although engagement surveys can help facilities better understand how to support their communities and to stay in touch with the markets they serve, community hospitals must go beyond just providing healthcare. They must "become an engine for health and economic growth in their communities," says Ms. Arduino.

She provided an example of this strategy at work. In 2006, Watford City, N.D., had a population of about 1,500, and that number skyrocketed to more than 15,000 in the past nine years due to the oil boom in that area. The infrastructure changed, and the community hospitals adjusted by getting involved in a number of functions outside of healthcare, such as becoming the force behind affordable housing developments in its market. Even if a community isn't going through significant change, all community hospitals should ask themselves, "How can we not only be an acute-care organization, but also lead the community as a whole?" says Ms. Arduino.

Challenge 2: Significant capital expenditures
With the financial pressures community hospitals are up against, investments needed to stay competitive and in compliance with federal regulations can be a tremendous burden.

There are significant technology investments hospital needs to make — from implementing or updating an EHR system to upgrading a revenue cycle system. Even with the federal government offering several special avenues of support for small and rural hospitals in purchasing health IT products, including grants from the Health Resource and Services Administration and other agencies, community hospitals are shifting their capital expenditures from infrastructure to technology.

For instance, Shenandoah (Iowa) Medical Center CFO Matt Sells recently said more than 75 percent of his hospital's capital allocation for 2015 has been set for technology.

Although 75 percent of the capital budget devoted to IT is a one-year item for Shenandoah Medical Center, as the hospital is implementing a new system this year, the continued investment needed to maintain and update the system in future years will be significant, which is certainly fiscally burdensome for community hospitals, according to Mr. Sells.

Unfortunately, with such a high percentage of their capital allocation going toward technology, some community hospitals are delaying clinical investments.

Addressing the problem of sizable capital expenditures
Outside of technology upgrades that are required by regulations, community hospitals should prioritize technology investments based on bottom line impact. For instance, if a hospital's revenue cycle management system is so dated it is impairing bottom line performance, that upgrade should be a top priority.

For independent community hospitals that do not have the means to finance these crucial investments, joining forces with a larger system for access to more capital resources is an option. These partnerships can take a variety of forms, from mergers that involve a larger system acquiring the hospital's assets to an affiliation, which provides community hospitals with the benefits of sharing resources, while avoiding some of the pitfalls of a merger, including significant legal costs and losing local control.  

Key considerations for community hospitals looking to merge
If a hospital is considering a merger, the first step in the process is determining whether there is a larger system in the area the community hospital wants to join forces with.

"There are areas in the country where they don't have forward-thinking larger systems," says Ms. Arduino. In those areas, a community hospital may be better off staying independent. Community hospitals should only team up with systems that have a vision for providing care in their region because even when partnering with a national system community hospitals must still serve their local markets.

To avoid losing touch with the communities they serve after joining forces with a larger system, community hospitals need to ensure the needs of their markets are still considered after the deal. First, the hospital needs to make sure the system structures the board in a way that allows it to maintain some power. Second, the community hospital needs to ensure there are open lines of communication. "If there's no mechanism of communication from the community level to the upper level or the communication is ignored, then the community hospital board is definitely disenfranchised," says Ms. Arduino.

There are a few other key considerations when partnering with a larger system, such as which services to keep local. "It is important to keep core services such as emergency care, urgent care and obstetrics local," says Mr. Charleston. "The larger health system can provide specialty acute services such as oncology and neurology."

Is affiliation a better option?
By providing a low level of integration, affiliations are a viable option for community hospitals. Through affiliation with a larger system, a community hospital can gain access to capital resources, enhance the services it offers and preserve its connection with local residents.

When considering an affiliation, not just any system will do. For instance, if a community hospital is thinking about affiliating because its IT systems are outdated, the hospital should look for a partner that has access to the IT capabilities the hospital is seeking.

As with any form of partnership, when considering an affiliation, community hospitals should also look for a partner that has a similar culture, as culture can affect every aspect of a business from financial performance to employee engagement.  

Challenge 3: Understanding the cost of care
Understanding cost is a problem plaguing the healthcare industry, but it is an especially burdensome issue for cash-strapped community hospitals. The migration toward value-based care has accelerated the need for hospitals to understand their costs. However, even in a fee-for-service world, it is vital that hospitals have a deep understanding of this information.

All hospitals have cost data, but it is in the general ledger and hardly actionable. For instance, when looking at the information in the general ledger hospitals cannot determine whether a service line is profitable or whether one physician is higher cost than another.

To take a deeper dive into cost information, hospitals need a cost accounting department or cost accounting tools that allow them to look at the information on a more granular level.

Addressing the cost of care issue
Implementing a cost accounting system is expensive, and doing so may seem out of reach for many community hospitals, according to Ms. Arduino. However, this investment should be a top priority, as it could make the difference between a hospital staying financially viable or having to close its doors.

Looking at the cost of each component of patient care is necessary for insurer negotiations. "Negotiating with payers is a daunting task for community hospitals," says Ms. Arduino, but with accurate cost information these facilities have more clout at the negotiating table.

In addition to dealings with payers, cost information is also necessary for hospitals to carry out successful cost-cutting plans.

To have constant access to this information, community hospitals need to implement tools that allow them to monitor their costs in real time on a daily basis. To stay financially viable, hospitals must "tightly control" cost per day or case or visit, according to Kanner Tillman, PhD, CFO of Sherman Oaks (Calif.) Hospital & Encino Hospital Medical Center.

If the resources are absolutely not available to update IT systems, there are other less-costly options, such as outsourcing. However, there is some hesitancy for hospitals to outsource — they feel they give up a level of control in the process, according to Ms. Arduino.

Challenge 4: High levels of bad debt
Bad debt consists of services for which hospitals anticipated but did not receive payment. The increasing popularity of high-deducible health plans and newly insured patients going to the emergency department for non-urgent care are causing bad debt to remain a major concern for healthcare providers, including community hospitals.

One factor causing bad debt to rise is the underinsured problem in the U.S. In a Commonwealth Fund survey of approximately 3,000 adults ages 19 to 64 who had at least one full year of insurance coverage, 23 percent were underinsured. The Commonwealth Fund considers underinsured Americans as those who spent 10 percent or more of their household income on medical bills in the past year or had a deductible of at least 5 percent of their income. When patients can't afford to pay for their portion of the medical services they receive, that leads to more bad debt for community hospitals.

High-deductible plans have exploded in popularity in recent years as an attractive option for low and middle income consumers due to their relatively low monthly premiums. Additionally, more employers are offering these types of plans; In 2006, only 4 percent of employed Americans were covered by high-deductible health plans, but that number skyrocketed to 20 percent in 2014, according to the annual health census published by America's Health Insurance Plans.

Although patients are the ones enrolling in plans that require them to pay more for their care, it is ultimately up to providers to collect that payment. Community hospitals —many of which are located in areas with high percentages of low-income patients— are feeling the squeeze.

This issue has captured the attention of community hospital leaders. In the annual American College of Healthcare Executives survey, 67 percent of community hospital CEOs identified bad debt, including uncollectable emergency department expenses and other charges, as one of the their top financial concerns.

Addressing the bad debt problem
To help prevent bad debt levels from rising, there are a number of steps community hospitals can take, beginning with reducing unnecessary ER visits. A survey released in May from the American College of Emergency Physicians showed 75 percent of ER physicians reported an increase in visits to their ER since Jan. 1, 2014.

Two of the major forces behind the surge in ER use are closely tied together — the primary care physician shortage and implementation of the PPACA. ACEP President Mike Geradi explained the issue to USA Today in May by stating, "There simply aren't enough primary care physicians to handle all the newly insured patients." Additionally, some physicians will not accept Medicaid because of its lower reimbursement rates, leaving some patients with no choice but to go to the ER for care.

A February report from the Commonwealth Fund found newly insured Americans are expected to account for only a 3.8 percent increase in primary care visits and that existing provider capacity should be sufficient to handle that growth. However, in areas with few physicians where people use more healthcare, action will have to be taken to keep ER visits from surging.  

Although some of the main forces behind the rise in ER use will have to be addressed from a national level, community hospitals can take action to help lower use. For instance, some newly insured patients are going to the ER for care because that is where they have always gone for medical treatment, according to Ms. Arduino. "Community hospitals must work with these people to redirect them," she says. Changing patient behavior is extremely difficult, but by communicating with patients —especially those that are frequent ER users — about other non-emergency care settings, community hospitals can make strides in decreasing ER use.

Improving billing practices to increase collections is another method to address the bad debt problem. "Community hospitals must have flawless revenue cycle processes in place to prevent revenue seepage," says Dr. Tillman. "That requires a strong hospital-wide focus and adequate investment of resources in all three stages of the revenue cycle." However, this is not an option for financially distressed community hospitals.

Short of a system update, there are other smaller changes facilities can make, such as collecting from patients at the point of service. Providers are significantly less likely to collect from a patient after care has been given and the patient returns home; therefore, collecting while the patient is still at the facility can help.

Community hospitals must take action
The financial pressures facing community hospitals across the nation are serious, and overcoming these issues will require putting new processes in place and thinking outside of the box. "The healthcare industry has not been kind to community hospitals over the past several years, and there is no indication that the industry will be any less cruel on these organizations during the next several years," says Mr. Charleston. "Survival in this world will take decisive and creative action."

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