Unique Problems Facing Rural Health Care

According to the National Rural Health Association (NRHA),[1] since 2010, more than 100 rural hospitals have closed.[2] This trend does not appear to be slowing. One recent study by Navigant Consulting, Inc. suggests that 21 percent or 430 hospitals across 43 states are at high risk of closing unless improvements are made soon to correct their total operating margins, days cash on hand, and debt-to-capitalization ratios.[3] A high number of these hospitals are located in the South. For example, the Navigant study indicates that between 40 and 50 percent of the rural hospitals in Alabama, Georgia and Mississippi are at risk — and many of these hospitals are considered community-essential facilities.

What Is the Diagnosis?

Why are rural hospitals going under at an alarming rate? In most situations, there is not one single cause but rather a combination of contributing factors.

Physician Shortages and Difficulties in Recruiting Physicians

One factor negatively affecting rural hospitals is a chronic shortage of physicians and the difficulty in attracting physicians to rural areas.[4] According to the Health Resources and Services Administration (HRSA),[5] as of June 2018, an additional 4,022 rural physicians were needed to close the gap in regions facing physician shortages.[6] The raw reality is that physicians can make more money in urban areas than rural areas, and urban physicians have access to better equipment than their rural colleagues do.

High Turnover in Leadership

The American College of Healthcare Executives reports that turnover rates for rural hospital CEOs range from 18 to 20 percent annually and in some areas are as high as 30 percent.[7] As with any organization, high turnover of management results in loss of institutional knowledge, general instability, inability to recruit for other key positions, loss of short-term and long-term vision, and — at a time when the need to increase revenue is key — disruption in fundraising. While inadequate compensation is a factor, numerous other factors contribute to the high turnover rate in rural hospitals, including increased regulatory burdens, inability to advance, and the cultural imbalance inherent in managerial migration from one industry or region to another.[8]

Revenue Issues

Rural hospitals often struggle with inadequate cash flow due to low patient volumes, a plethora of uninsured patients, low government reimbursement rates, and difficulty in getting payment from private insurers. Some have suggested that the risk of closure increases in states that have opted out of Medicaid expansion. In short, rural hospitals are having to do more with less. Exacerbating this revenue challenge for rural hospitals is the fact that they have traditionally been paid on the basis of bed capacity, which has declined remarkably over the last 20 years. Rural hospitals have tremendous excess bed capacity now, which may make their current economic model unsustainable.

For critical-access hospitals, the economic model is even more bleak. While federal regulations set Medicare reimbursement for such facilities at 101 percent of allowable costs, sequestration and strict exclusions from what is deemed an “allowable” cost means that these facilities are actually reimbursed less than 100 percent of their actual costs. Meanwhile, indigent care has exploded, and the Federal Emergency Medical Treatment and Labor Act[9] often mandates the provision of emergency care and basic treatment regardless of payment.

To address the “top line” issues of generating revenue and doing more with less, at least one rural hospital plans to diversify its services and offerings to attract more patients from its core market. The Panola County Hospital in Batesville, Miss., was acquired by an investor group as part of an asset sale in early 2019 out of the Curae Health Inc. chapter 11 case pending in Nashville, Tenn.[10] The acquiring entity’s vision for growth includes adding physical therapy services and wellness programs, and enhancing preventative health services. The goals are to offer better health care and to generate revenue in doing so by offering tests, like mammograms and colonoscopies, to take advantage of both government and private health insurance.[11]

Expense Issues

Many rural hospitals struggle with rising costs for electronic health records[12] and other equipment. Consequently, many of them are ceding control or are seeking alliances with larger urban hospitals, in part to share electronic record costs. Even filing bankruptcy does not eliminate the patient-record issues altogether without a one-year process after notice.[13] And at a time when revenues are shrinking, operating an emergency room continues to be the highest financial burden for rural hospitals.[14]

Is There a Cure?

Some ideas for addressing the problems faced by these hospitals are basic, and perhaps overly optimistic in terms of being able to significantly increase revenue on the one hand and bend the cost curve on the other. These ideas include increasing the availability of federal grants, reducing regulatory burdens, and improving reimbursement processes and rates. Adding services in the manner envisioned by the Panola County Hospital’s new ownership team is another approach to confronting these sustainability problems. Such services could conceivably include expanded use of nurse practitioners, as well as offering services like home health, pharmacy and telemedicine. However, these new service lines carry their own business challenges and regulatory risks.

Many facilities are also attempting to align with their more metro peers through the formation of joint ventures and investment interests. Unfortunately, these efforts and strategies are either piecemeal or will require protracted political solutions, and they do not address the immediate and long-term systemic pressures facing rural America and its underserved population. From a macroeconomic perspective, the problems facing rural America’s health care system are just another manifestation of the “Wal-Mart effect,” whereby large conglomerates hasten the extinction of local businesses — in this case, hospitals and for-profit clinics run by doctors as a business, but with deep community ties. Demographic changes and urbanization, coupled with economies of scale implemented by large health care companies, have doomed many such former pillars of small-town America.

Consequently, many rural hospitals have closed or have been forced to resort to bankruptcy as an option. Some are able to use chapter 11 bankruptcy relief to reorganize. One example of a successful rural hospital reorganization is HMC/CAH Consolidated Inc.[15] HMC and its affiliates owned or operated critical-access hospitals in Kansas, Oklahoma, Missouri, Tennessee and North Carolina.[16] It filed for chapter 11 relief when a financing arrangement fell through. After months of intense negotiations, HMC was able to generate cash from the sale of some of its managing rights and office facilities to fund its plan, which the bankruptcy court approved.

Other rural hospitals opting for bankruptcy are unable to reorganize and instead pursue an orderly liquidation. One such example of an orderly liquidation is the Curae Health Inc. case mentioned above. Curae and its affiliates owned rural hospitals in Mississippi and Alabama. According to the Curae disclosure statement, higher-than-expected information-system costs and lender disputes precipitated the chapter 11 filing, which ended up in a series of § 363 sales and a liquidating chapter 11 plan.[17]

Another example of rural hospital liquidation in bankruptcy is Pioneer Health Services Inc.[18] Pioneer and its affiliates owned or operated several critical-access hospitals in Georgia, Mississippi, North Carolina, Tennessee and West Virginia. Pioneer and its affiliates filed for chapter 11 relief as a result of IRS tax liens, a dispute with its information technology vendor, and audits and claims asserted by the Center for Medicare and Medicaid Services that resulted in recoupment, decreasing overall cash flow.[19] Through a series of § 363 sales, substantially all of the assets of the Pioneer entities were sold and a plan of liquidation was eventually confirmed in the jointly administered cases. Nevertheless, more than one of the rural facilities in the Pioneer cases closed and were merely asset sales as opposed to going-concern sales.

Conclusion

Rural hospital closures affect millions who are seriously at risk. According to the NRHA, rural Americans are almost 40 percent more likely to have coronary heart disease and 8.6 percent more likely to have diabetes compared to their urban contemporaries.[20] The closing of rural hospitals only compounds the plight of individuals in rural areas who are already experiencing severe health problems. Many will not seek care simply because of the distance to the next available facility.

Closing a rural hospital can also have a devastating impact on a community. In addition to the loss of jobs, it negatively affects the ability of the community to attract businesses and to recruit new talent to the community. For that reason, towns like Batesville, Miss., have enlisted the involvement of local economic-development organizations in their attempts to keep the hospital doors open.[21]

While a number of approaches have been suggested, bankruptcy remains a viable option for many rural hospitals, until a political consensus emerges on America’s broader health care challenges and overall access to health care. Until that time, some hospitals will be able — and no doubt will be required — to use chapter 11 to successfully reorganize or to shed assets and allow new management to try new methods to keep the doors open. As the Panola County Hospital case attests, a sale of a rural hospital to a new owner with vision is preferable to a community losing its only source of major health care.[22]