Risky Business for Rural Hospitals

How rural healthcare organizations are faring in non-Medicaid expansion states.

This article first appeared in the July/August 2016 issue of HealthLeaders magazine.

Hospitals in rural areas of the country are feeling a sharp financial pinch in states that have not expanded their Medicaid programs under the Patient Protection and Affordable Care Act.

Community hospitals in rural counties of Tennessee, one of the states that have opted not to embrace Medicaid expansion, are facing financial pressure that could be relieved if more of their low-resource patients had Medicaid coverage. "In our health systems, they manage it. They have figured it out. Where it's really hitting is our rural hospitals," says Craig Becker, president of the Tennessee Hospital Association. "We've lost six rural hospitals in the last year, and we're going to lose another one this year."

In economically disadvantaged Tennessee communities, many nonelderly adults are either reliant on Medicaid for their health coverage or fall into the "self-pay" category, Becker says. "We only get about 5% of payment for self-pay patients."

Medicaid is a public form of medical insurance jointly funded by the states and the federal government. Under the PPACA, states can expand their Medicaid programs with federal financial assistance to include all adults in families with incomes below 138% of the federal poverty level.

As of this year, 31 states including the District of Columbia have expanded Medicaid through provisions of the PPACA. Nineteen states have not expanded Medicaid under the federal law: Alabama, Florida, Georgia, Idaho, Kansas, Maine, Mississippi, Missouri, Nebraska, North Carolina, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Wisconsin, and Wyoming.

Failure to expand Medicaid pushes rural hospitals to brink
 

The absence of Medicaid expansion played a role in this year's closure of McNairy Regional Hospital in Selmer, Tennessee, says Wayne T. Smith, chairman of the board and CEO of the facility's parent company, Franklin, Tennessee–based Community Health Systems. The 45-bed acute-care hospital closed in May.

"Several factors impacted the decision, primarily the unforeseen and significant repairs to the hospital's plumbing system and a steady decline in patient use. As a rural hospital, McNairy Regional was also challenged by cuts in federal reimbursement for services as part of the Affordable Care Act. The reimbursement changes were predicated on more people having insurance, whether through Medicaid expansion or insurance exchanges. The lack of Medicaid expansion—to date—has left many of the state's most vulnerable citizens without access to health insurance, leaving hospitals to address the unsustainable burden of uncompensated care," Smith says.

Community Health Systems owns, leases, or operates 159 hospitals in 22 states. For 2015, the health system posted net operating revenue of about $19.4 billion.

Rural hospitals in Tennessee and other non-Medicaid-expansion states are in a fundamentally weak financial position, Smith says. "Rural areas tend to have higher unemployment, more uninsured individuals, and a greater percentage of patients on Medicare and Medicaid. Many of the more rural communities where CHS-affiliated hospitals are located in Tennessee are facing these same challenges. Hospitals in states where Medicaid expansion has stalled have been left to absorb reimbursement cuts—estimated at more than $7 billion over 10 years for Tennessee hospitals—as well as increases in bad debt and uncompensated care, with very little of the off-setting revenue that would result from expansion.

"In addition to providing uninsured patients with access to care, Medicaid expansion would reduce the charitable care and bad debt costs that are spread throughout the system. According to a report from the Boyd Center for Business & Economic Research at the University of Tennessee, Tennessee hospitals spent $1.1 billion on charitable care and bad debt in 2014."

Medicaid expansion would provide health coverage to thousands of poverty-stricken adult Tennessee residents, which would improve their lives and ease financial pressure on hospitals, Smith says.

"More than 200,000 Tennesseans with annual incomes less than 138% of the federal poverty levels could benefit from expansion. There has been a focus on the financial implications of not expanding Medicaid, but the impact it has on individuals is significant. Every day, people come to our emergency departments with conditions that, in many cases, could have been avoided if these patients had access to primary care services. From our perspective as a healthcare company, we want patients to receive the care they need, particularly preventive services that could delay or prevent the onset of chronic diseases, which is why we encourage every state where we operate affiliated hospitals to expand Medicaid.

"In Tennessee, the number of uninsured patients seeking care at our hospitals has decreased slightly but not at the same rate as in states that have expanded Medicaid. This is occurring as hospitals are experiencing significant Medicare payments reductions—in part to pay for expansion—as well as other significant issues, such as meaningful use, value-based purchasing, and soaring drug prices."

Local taxpayers help rescue hospital
 

Houston County is a rural area at least an hour's drive west of Nashville with about 8,300 residents and one hospital, which has been teetering on the edge of financial disaster since declaring bankruptcy in 2008. In March 2013, the county commission bought Houston County Community Hospital for $2.4 million.

"I've learned more about healthcare in the past three years than I ever wanted to know," County Mayor George Clark says of his ownership role for the 25-bed hospital. "I'm not there every day, but I get a report from them every day."

In 2013, the reports Clark was receiving from HCCH were grim. "They were having a census of 0 to 1 patients a day," he says.

In fall 2014, HCCH was reeling, with hundreds of thousands of dollars in bad debt inherited from the previous owner and an equally daunting gap between costs and revenue. To keep the hospital afloat, the Houston County Commission approved a 60-cent increase in the local property tax rate to raise about $700,000 for the facility the following year. "It's the largest tax increase I've ever had to do," says Clark, who has served as the county's mayor for more than three decades.

"We were looking at losing a hospital. It would have affected everything," he says, noting a 1,500-bed nursing home in the county was one of the dominoes that local officials feared would fall if HCCH closed its doors. "Economically, it would have been a big impact to us."

Lives were also at stake if the hospital shut down, Clark says. "Our county is long and narrow. If I had a situation in the western half of our county, it would take an hour to an hour and a half to get to a hospital.…Without this hospital, people could die, and how do you put a price on that?"

C. Timothy Gary, CEO of Nashville-based DW Franklin Consulting Group, has been helping to lead HCCH's financial revival efforts. The strategy features both cost-cutting and garnering new revenue, he says. "You can't cut your way to prosperity. You also have to generate revenue."

To decrease costs more than $2.5 million annually, HCCH has renegotiated contracts with vendors, reduced staffing, and cut supply expenditures, Gary says. Slashing the hospital's full-time equivalent labor budget from about 95 employees to 65 was a painful process, he says. "That's a discipline that a lot of hospitals are not used to. … They had three nurses on staff with two or three patients in the hospital. They've gone from that to a minimal staffing pattern. Reductions were across the board, as the entire staffing model really didn't take into account the changes in the market realities. However, the nursing staff was the area that required the most attention."

For some senior executives, the pain was too much to bear. "Some of the longtime management understood it, but they couldn't get there, so we had some retirements," Gary says. "We had to bring in some folks who understand that you manage to a budget or you don't have a hospital."

Supply chain savings from changing HCCH's group purchasing organization have been less dramatic but significant nonetheless, Gary says. "They were spending about a half million dollars on supplies. We cut $100,000 per year out of their spend. That's two people we were able to save with that kind of a change."

One of the ways HCCH has increased revenue is by boosting the capability to perform ambulatory surgical procedures, he says. "We partnered with a surgeon who does arthroscopic surgeries. He works for three facilities."

The partnership with the arthroscopic surgeon is part of a broader strategy to boost the hospital's image in the county and draw more inpatient cases, Gary says. "The ambulatory services that we added are almost exclusively outpatient. However, offering those services has raised the profile of the hospital in the community, which has resulted in greater utilization and an increase in the inpatient census."

By adding the arthroscopic surgeries, the hospital has boosted its daily inpatient census to about six, Clark says, noting there are plans to add gastroenterology services soon. "Our business is growing. We're bringing the hospital back to where it needs to be."

The county mayor says 10 is the magic number for HCCH's inpatient census. "That's where we can get to breaking even. We're not there yet, but we're getting there."

The hospital has also increased revenue through one-time infusions of cash, such as grants and federal meaningful use payments linked to investments in electronic medical record technology. Last year, HCCH received a $1 million payment from the meaningful use program after spending $200,000 on EMR upgrades, Gary says. This year, the hospital is expecting a $700,000 net gain from federal payments tied to EMR upgrades, he says. 

HCCH is showing financial improvement, according to annual auditor reports.

For the year ending June 30, 2014, HCCH posted total operating revenue at $4.2 million and an operating loss pegged at $1.8 million. For the year ending June 30, 2015, HCCH posted total operating revenue at $5.2 million and an operating loss pegged at $464,000.

'The problem is systemic and cumulative'
 

In Missouri, hospitals have been struggling financially from the absence of Medicaid expansion in ways that mirror the experience in Tennessee, says David Dillon, vice president of public and media relations for the Missouri Hospital Association. Failure to expand the program has played a role in the closure of four hospitals in the Show Me State, including two rural hospitals, he says.

"Although there has not been a hospital closure exclusively due to the lack of Medicaid expansion, it has been a significant contributing factor in every Missouri hospital closure since ACA implementation. Moreover, the lack of expansion has reduced investment in hospital services, staff, facilities, and community-based programs throughout the state. The problem is systemic and cumulative."

Missouri-based health systems also are feeling the non-Medicaid- expansion-state financial pain, says Kris Zimmer, senior vice president of finance at St. Louis-based SSM Health.

For 2015, SSM Health posted total operating revenue at $5.4 billion. The health system operates 20 hospitals in a Medicaid expansion state—Illinois—and three states that have not expanded the program—Missouri, Oklahoma, and Wisconsin. In the non-Medicaid expansion states, SSM is enduring a significant financial drain, Zimmer says. "When the ACA was originally proposed, we understood that much of it would be funded by reducing Medicare reimbursements for hospital services. As it has rolled out, we continue to feel the impact of these reductions, especially as three of the states we serve have not adopted Medicaid expansion. We have been able to overcome these challenges by reducing costs in several ways, including revenue cycle improvements, centralizing and standardizing support services, and renegotiating supply and vendor contracts."