Rural Healthcare Amidst Reform: Are Critical Access Hospitals Endangered?

In November 2009, Debra Wright, RN, MSBA, stepped into the corner office as CEO of Howard Memorial Hospital in Nashville — that is, Nashville, Ark. The 20-bed critical access hospital sits within a city of about 5,000 people halfway between Dallas and Little Rock and about 45 miles from the nearest full-service provider in Texarkana, Texas.

"And those are Arkansas miles," Ms. Wright says with a laugh. "As my grandson says, they are wiggly roads."

She used to work at one of those larger hospitals in the Texarkana area as a nurse and eventually made her way up to administrative roles, including chief nursing officer and chief clinical officer. She heard about the chief executive opening at Howard Memorial, and the hospital's board of directors gave her a shot, something she has been "very appreciative" of to this day. But she has had to deal with some rather large learning curves associated with CAHs.

HowardMemorialHospitalMs. Wright went from managing the nursing and clinical strategies for upwards of 500 full-time equivalent employees to managing the entire direction of a CAH with 120 FTEs, total. "I have had to really learn, in transitioning to this hospital, how to be a good generalist," she says. "And the way the financials are in a CAH versus a [prospective payment system] hospital, it is so different. Contracting, in-house attorney — you just can't afford all that support in a small facility."

This year, iVantage Health Analytics named Howard Memorial as one of the "Top 100 Critical Access Hospitals" in the United States due to the organization's high quality scores, patient satisfaction, affordability, efficiency and sound finances. Not all CAHs have Howard Memorial's reputation, though, and many have been making headlines as of late for inauspicious reasons.

Due to high rates of uncompensated care and generally shaky bottom lines, several have had to close their doors this year: Vidant Pungo Hospital in Belhaven, N.C., Charlton Memorial Hospital in Folkston, Ga., Stewart-Webster Hospital in Richland, Ga., Calhoun Memorial Hospital in Arlington, Ga. The list goes on, and it probably will continue over the coming years as CAHs, like all healthcare providers, try to adapt to a changing healthcare environment.

The most notable recent news item for CAHs was an August report from the HHS Office of Inspector General. The government report found Medicare spent an extra $449 million in 2011 reimbursing facilities that don't meet location requirements for CAH status.

With CAHs closing across the country and the OIG calling for a reassessment of the program, a major question has bubbled to the surface of the hospital sector: Are CAHs facing a new paradigm that could put them out of business?

Background of critical access hospitals

The "critical access hospital" designation made its way into healthcare vernacular after the Balanced Budget Act of 1997, but the concept of CAHs started even earlier.

According to the Medicare Payment Advisory Commission, the CAH program was created through the combination of two separate demonstrations: the Medical Assistance Facility program and the Rural Primary Care Hospital program. Together, the programs said small, rural hospitals should receive cost-based payments from Medicare — instead of prospective payments — because of their isolated locales and limited services. Today, Medicare pays CAHs 101 percent of their allowable costs for outpatient, inpatient, lab and other services. Medicare pays slightly above cost to ensure the CAH stays open for its community.

Today, there are 1,332 CAHs throughout the country, according to the Flex Monitoring Team at the Universities of Minnesota, North Carolina and Southern Maine. (The Flex Monitoring Team works with the federal government to monitor and evaluate CAHs.) In other words, CAHs represent one out of every four acute-care hospitals. Every state contains a CAH except Connecticut, Delaware, Maryland, New Jersey and Rhode Island. In 2011, Medicare reimbursed CAHs roughly $8.5 billion for care, meaning the average CAH received about $6.4 million in Medicare revenue.

To be considered a CAH, a hospital has to meet certain requirements. Most notably, a CAH cannot have more than 25 acute-care beds, must offer 24-hour emergency services and cannot have an annual average length of stay greater than 96 hours. Essentially, a CAH is a stopgap between a pure outpatient facility and full-fledged tertiary care provider.

CAHs also must meet specific locations requirements, which were the subject of the government's report.

The OIG report: Lightening rod for discussion

According to CMS, CAHs must meet two location-related requirements: They must be more than 35 miles from another hospital, or they must be 15 miles from another hospital in mountainous terrain or areas that only have rugged secondary roads. Hospitals were able to get around those location requirements if their state designated them as a "necessary provider." Necessary providers, which make up about three-quarters of CAHs, still must abide by all other CAH requirements, but they don't have to follow the distance rules. However, Congress eliminated that exemption in 2006, and CAHs can no longer obtain the "necessary provider" status.

In the recent report, analysts at the OIG found that 849 CAHs — two-thirds of all CAHs and many of which are "necessary providers" — would not meet the location requirements if they reapplied for CAH status today. More than 70 hospitals alone were located fewer than 10 miles from the nearest hospital. If CMS decertified hospitals that did not meet the location rules — thus putting the facility on the more variable inpatient and outpatient prospective payment systems — the government could have hypothetically saved $449 million in 2011 alone.

The OIG recommended CMS remove the permanent exemption from "necessary provider" CAHs so CMS could reassess them, and it also suggested that CMS revise the CAH program to include alternative location-related requirements. "For example, CMS could allow CAHs to keep their certifications if they serve communities with high poverty rates, even if they don't meet the location requirements," the report stated. CMS agreed with most of the OIG's suggestions, except Administrator Marilyn Tavenner did not agree with the additional location-related requirements. In a letter, she said establishing new criteria would be both burdensome to implement as well as challenging, since socioeconomic location factors could easily fluctuate.

Don White, a media spokesperson for the OIG, declined to comment further on the report and instead referred to a recent OIG podcast transcript. In the podcast, Brian Jordan, an OIG analyst who worked on the report, said the agency wanted to make sure the enhanced payments to CAHs are "tax dollars well spent."

"We were concerned that some of these hospitals may not be providing critical access to rural patients because they were located very close to other hospitals that could provide similar services," Mr. Jordan said. "Remember, necessary provider hospitals never had to meet the distance requirement. And, until March of 2013, CMS never went back to check that other CAHs still met the location requirements. With new hospitals being built and towns expanding, some of these hospitals might no longer qualify for CAH status."

Industry insight and reaction: What could this mean for CAHs?

After the OIG published its report, a flurry of reactions came from every corner of the healthcare sector. Hospital and rural healthcare advocates met the OIG's recommendations with discontent, arguing that enhanced Medicare payments to CAHs are the lifeline for both the hospitals and communities. Government and reform advocates viewed the report as a way to reduce unnecessary Medicare expenditures in areas with numerous hospitals. Consolidation analysts said the proposal could be a way to counter health systems that own CAHs as well as nearby tertiary facilities.

The OIG's report also followed in the footsteps of President Barack Obama's budget proposal for 2014. In April, President Obama proposed cutting more than $2.1 billion from CAHs over the next decade in two ways: First, CAH payments would be reduced from 101 percent of reasonable costs to 100 percent of reasonable costs. Second, in the same vein of the OIG's findings, CMS would prohibit CAH designation for facilities that are less than 10 miles from the nearest hospital.

To be clear, the OIG did not call for the closure of any CAHs. In addition, any action to result from the OIG's report is unlikely, considering CMS is busier dealing with the implementation of the Patient Protection and Affordable Care Act. As for President Obama's plan, Congress has shown it is more willing to shut down the government than act on a budget proposal.

Nonetheless, CAH leaders have said if the government ever went through with the OIG's recommendations to "reassess" the program, it would inevitably lead to closures since most CAHs treat a high proportion of Medicare beneficiaries.

"I would say if CAHs lost their reimbursement, many throughout the country would be forced to close. They wouldn't survive," says Jim Ferando, president of Banner Health's Western Region. He oversees seven different Banner CAHs scattered throughout Arizona, California, Colorado, Nebraska and Wyoming. "Most of the small rural facilities run at 1 to 2 percent margins. Those margins would go away if they lost their Medicare cost reimbursement."

Ron Christenson, CFO of Morris County Hospital, a 25-bed CAH in Council Grove, Kan., agrees. He says although his hospital is currently on "solid financial footing," converting back to the Medicare prospective payment systems — which would happen to CAHs under the OIG's recommendations — would be detrimental.

"The IPPS and the OPPS reimbursement models are clearly based on the urban healthcare delivery systems where there are significant volumes of patients to offset the lower payment levels," Mr. Christenson says. "That system just doesn't work well in a rural setting where you don't have that level of business."

Tim Putnam, DHA, president and CEO of Margaret Mary Community Hospital, a 25-bed CAH in Batesville, Ind., says the government doesn't have to look too far to see many rural providers are already out on the bleeding edge.

"It's tough to look at the OIG report and say you can save $400 million when you know a hospital has closed in Georgia," Dr. Putnam says, referring to the multiple CAH closures in Georgia earlier this year. "When you lose a strong rural hospital, the community loses a strong portion of its infrastructure. It's going to be difficult to sustain any economy, and it will be virtually impossible to establish a strong healthcare system ever again."

Dr. Putnam, who also is the president of the Indiana Rural Health Association, adds that the 101 percent of allowable costs that CAHs receive is somewhat misleading. Medicare does pay CAHs an automatic profit on services, but many other necessary services — like legal and marketing — aren't factored into that total. So, for example, while a CAH receives 101 percent of costs for knee surgery, any costs to advertize the surgery department come out of the hospital's coffers.

"If you run a healthcare organization today without occasionally consulting an attorney, that's a pretty risky endeavor," Dr. Putnam says. "And if you don't let the community know what services or physicians you have available, you have a tendency to lose those patients to others who market more aggressively. Many of these costs you need to run a business are not [factored in]."

Mr. Ferando of Banner Health says the Medicare payments for CAHs are especially needed right now amidst healthcare reform. Electronic health records, the transition to ICD-10 and physician recruitment are all costly endeavors, especially for facilities that don't have much room for error if something goes wrong.

"We're fortunate with Banner to have centralized billing, but for smaller independents, that's a big deal," Mr. Ferando says. "But even for us, physician recruiting is difficult. You have to find the right doctor willing to go to Worland, Wyo."

Rural healthcare — and its patient base

In nearly every hospital mission statement, patients will find verbiage centered on high-quality, patient-centered care. Mr. Christenson says if Morris County Hospital, roughly 25 miles away from the next-closest hospital, ever lost its CAH designation, it would negatively change the health patterns of elderly community members.

"If the hospital closed, all of the senior population would have great difficulty traveling to the next nearest healthcare facility. There are a number of them in town that don't even drive anymore," says Mr. Christenson, who has been CFO since 2007. "If this hospital weren't here, I am afraid most of them wouldn't go to the doctor anymore because it would be just too hard for them to get there."

Ms. Wright, CEO of Howard Memorial, knows rural providers serve a need, and she says it's not practical to think the system would allow hundreds of CAHs to close overnight. The close-knit communities, she says, wouldn't allow it to happen either.

"When you look at our HCAHPS, quality and patient satisfaction scores, you see we're working really hard to take good care of people," she says. "And in a rural community, these are friends and relatives — truly loved ones that you're caring for every day. Our mission takes on a lot of importance when you see these people at Wal-Mart or church or school. That's not a stranger to you."

More Articles on Critical Access Hospitals:
12 Statistics on Meaningful Use Attestation Among Critical Access Hospitals
5 Issues Forcing Standalone Hospitals to Consider the M&A Market
OIG Suggestion to Decertify Critical Access Hospitals Draws Criticism

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