Hospital Finances

America’s Rural Hospitals Are On Life Support. Is The Medicare Rural Emergency Hospital Program The Cure?

Rural hospitals in the United States are closing at an alarming rate. 190 of them have closed since 2005. In 2019 alone, 18 rural hospitals closed. Federal COVID relief funds brought a brief respite with only 3 rural hospitals closing in 2021 and 7 closing in 2022. But now that those relief funds have largely been exhausted, we are back on track to see an increasing number of closures this year. The Center for Healthcare Quality and Payment Reform estimates that there are 600 rural hospitals (one-third of all U.S. rural hospitals) at risk of closing in the near future.

Each hospital has different reasons for closing but in general, it is due to persistent losses on patient care services and insufficient financial reserves. Rural hospitals are generally smaller than metropolitan hospitals. The American Hospital Association reports that half of rural hospitals have fewer than 25 beds. It is generally not cost-effective to maintain 24-hour services such as radiology, lab testing, blood banking, respiratory therapy, and pharmacy for a very small number of inpatients as these services require a critical mass of patients to cover their expense. Rural hospitals account for 35% of the nation’s hospitals but account for 59% of hospital closures. Data from the University of North Carolina’s Shep’s Center shows that Texas has had the largest number of rural hospital closures at 27 followed by Tennessee at 15 and North Carolina at 11.

One of the most important functions of rural hospitals is to provide emergency care. For patients with conditions such as trauma, myocardial infarction, stroke, pulmonary embolism, and gastrointestinal bleeding, timely initial medical care at even a small emergency department can mean the difference between life and death. When a rural hospital closes, not only do rural residents have to travel farther to receive healthcare, but the rural community also loses a major employer. That often results in hospital workers moving to urban areas in order to stay employed.

To address this evolving crisis in rural healthcare, CMS created the Rural Emergency Hospital program that went into effect in January 2023. Under this program, Medicare pays hospitals $3.27 million per year and increases payment for patient care services to 105% of the usual Medicare reimbursement. In exchange, the hospitals have to maintain a staffed emergency department and no longer admit patients for inpatient care.

Requirements to qualify as a rural emergency hospital:

  • Have met criteria as a critical access or small rural hospital with no more than 50 beds on December 27, 2020
  • Do not provide inpatient care
  • Do not exceed an average observation length of stay of greater than 24 hours
  • Be located in a state that licenses rural emergency hospitals and be licensed as such
  • Be enrolled as a Medicare provider
  • Have a transfer agreement with a level I or level II trauma hospital
  • Maintain a staffed emergency department 24 hours a day, 7 days a week that meets Critical Access Hospital emergency care criteria
  • Have blood bank, radiology, laboratory, and pharmacy services
  • Have a physician, nurse practitioner, clinical nurse specialist, or physician assistant available 24 hours a day immediately by phone and within 30 minutes to travel on-site

The downsides of becoming a rural emergency hospital

The biggest sacrifice in becoming a rural emergency hospital is giving up inpatient care. That means no obstetrics, no intensive care unit, and no inpatient surgeries. These are often the best-paying services that hospitals provide. Becoming a rural emergency hospital does not eliminate a lot of the regulatory requirements that burden inpatient hospitals. Rural emergency hospitals are still subject to periodic site visits by Medicare inspectors – the CMS conditions of participation document that describes all of the specific regulations reviewable during site visits is 118 pages long. Fortunately, most of these conditions are similar to or the same as conditions for regular inpatient hospitals so most hospitals will have already met these requirements prior to converting to a rural emergency hospital.

Any patient who requires an inpatient admission must be transferred to a full-service hospital. For residents of the community, that can mean driving an hour or more to deliver a baby or to have a surgery that might require admission to the hospital afterward. It can mean an hour-long ambulance ride to be admitted for a COPD exacerbation or flare of heart failure. This can be isolating for patients requiring hospitalization when family and friends must now travel long distances for hospital visits.

For the physicians who practice in that community, it means no longer providing inpatient care. Although many primary care physicians may be happy to be relieved of the demands of taking care of their handful of inpatients, it can be disruptive to the continuity of care of those patients. Family physicians in the community would no longer be able to deliver babies. For some physicians, this can mean a loss of an important percentage of their professional revenue that in the past came from inpatient services. It will become very difficult for specialists such as cardiologists, OB/GYNs, general surgeons, and pulmonologists to maintain financially viable practices in communities lacking an inpatient hospital.

Should your hospital become a rural emergency hospital?

There are a number of factors to consider when a hospital contemplates conversion to rural emergency hospital status:

Is it legal in your state? One of the key requirements to become a rural emergency hospital is that the hospital must be located in a state that licenses them. Only 7 states have approved licensing as rural emergency hospitals: Arkansas, Illinois, Kansas, Michigan, Nebraska, South Dakota, and Texas. Other states are likely to pass legislation permitting rural emergency hospitals in the near future but this is currently a barrier for hospitals not in one of these 7 states. If your state does not license rural emergency hospitals, then start lobbying your state legislature now so that your hospital have the option of converting to a rural emergency hospital in the future.

Did your state adopt Medicaid expansion? States that did not adopt Medicaid expansion had higher numbers of rural hospital closures than those states that did adopt Medicaid expansion.

Since 2005, the 11 states that did not adopt Medicaid Expansion accounted for 51% of all rural hospital closures in the United States. States that adopted Medicaid had an average of 2.4 rural hospital closures whereas states that did not adopt Medicaid expansion had an average of 8.7 rural hospital closures. Americans living in rural areas have a higher poverty rate (15.4%) than those living in metropolitan areas (11.9%). This poverty disparity is greatest for Black Americans living in rural areas (30.7%) versus Black Americans living in metropolitan areas (20.4%). Overall, since 2007, per capita income in rural areas is 25% lower than in urban areas. As a consequence, states that did not expand Medicaid now have a higher percentage of low-income, uninsured people living in rural areas. People lacking health insurance still get sick and injured, however. When they require hospitalization, the hospital does not get paid. This has led to disproportionate financial failure of rural hospitals in states that did not adopt Medicaid expansion. As an example, Texas has the highest percentage of uninsured population in the country (20%) and also had the highest number of rural hospital closures since 2005 (27 hospitals).

Hospital size matters. The 190 rural hospitals that have closed since 2005 were mostly small with an average of 36 beds. 79% of all closed hospitals had fewer than 50 beds and 55% had 25 or fewer beds. When the hospital inpatient census becomes low, hospitals frequently run a deficit since it is difficult to provide comprehensive 24-hour a day services for a small number of patients. The fewer the number of inpatient beds, the more likely a hospital will financially fail and close.

It’s all about the financial statement spreadsheet. Every rural hospital in the U.S. is different. Some have non-patient care revenue in the form of endowments, county support, state support, or religious organization support. Others are fortunate to have a high percentage of commercially-insured patients. Some have had forward-thinking leaders who have avoided financial losses by careful resource allocation and building up their number of days cash on hand. Each hospital must look at its unique financial situation to determine whether they are better off accepting the $3.27 million and giving up their inpatient beds to become a rural emergency hospital or continuing their inpatient services and passing on the $3.27 million.

What will Medicare Advantage plans cover? Emergency department visits, observation stays, and outpatient services are covered by Medicare Part B for those Medicare recipients who have traditional Medicare. However, 45% of Medicare enrollees are now covered by Medicare Advantage plans (Medicare Part C). These plans dictate which physicians the patients are allowed to see, what outpatient services will be covered based on prior authorization, what co-pays are required by the patient, and what deductibles are required by the patient. Hospitals contemplating conversion to rural emergency hospital status need to do an inventory of Medicare Advantage plans used by the hospital’s patient population and ensure that payment for emergency and outpatient services from these plans will cover the cost of providing those services. A good place to start is to look at the denial rates at your hospital by the various Medicare Advantage plans in your community. A Medicare Advantage plan that has historically denied a high percentage of emergency and outpatient services will continue to do so if the hospital becomes a rural emergency hospital. Hospitals also need to ensure that the physicians, nurse practitioners, and physician assistants who provide emergency services are in-network for those Medicare Advantage plans.

A rural emergency hospital is better than no hospital

American healthcare is increasingly dominated by large multi-hospital health systems. This has been a result of a trend of hospital mergers and acquisitions over the past 25 years. Many small rural hospitals have either outright gone out of business or have been acquired by and then closed by larger health systems. But when a rural hospital closes, the healthcare needs of the people in its community does not go away.

CMS has thrown America’s rural hospitals a lifeline that can help them continue to provide emergency services and outpatient services to their communities. Although this will not be as good as having local inpatient services, it is better than nothing.

March 13, 2023

By James Allen, MD

I am a Professor Emeritus of Internal Medicine at the Ohio State University and former Medical Director of Ohio State University East Hospital