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By Clarissa Donnelly-DeRoven

Between the start of the pandemic and February 2021, rural hospitals nationwide received nearly $15 billion in federal relief dollars, according to researchers at UNC’s Cecil G. Sheps Center for Health Services Research. 

But while the money helped slow the pace of rural hospital closures and enabled these facilities to care for critically ill patients during COVID-19 surges, it did little to address the financial crises facing them before the pandemic. The temporary federal funding may in fact make many rural hospitals appear more financially stable than they really are, according to four different analyses of rural hospital finance data. 

These unrelated analyses come from the Sheps Center, the Center for Healthcare Quality and Payment Reform, the Bipartisan Policy Center, and Chartis, a health care advisory group. 

For instance, the Center for Healthcare Quality and Payment Reform – an independent center that does policy analysis – estimates that 13 of North Carolina’s 54 rural hospitals might be at risk of closing, nearly a quarter.

While the exact numbers differ, the latter three studies estimate that hundreds of rural hospitals nationwide could be at risk of closure once the federal dollars stop flowing and hospital balance sheets return to normal. 

What solutions exist?

Some of the most common policy proposals offered to stem the tide of closures include expanding Medicaid, so hospitals care for fewer people without insurance, and eliminating Medicare sequestration — a payment policy whereby the federal government reimburses facilities either 98 or 99 percent of the actual cost of care, rather than the full 100 percent. 

Many rural hospitals see more uninsured patients, more patients who are covered by Medicare or Medicaid, and fewer private insurance patients than urban hospitals do. Any changes to those federal programs can have a disproportionate impact on rural hospitals’ ability to stay financially afloat.

“There is a lot of evidence about if you’ve expanded Medicaid, that it becomes a bigger source of revenue for these hospitals and helps sustain them,” said Julia Harris, a policy analyst at the Bipartisan Policy Center and co-author of the organization’s analysis about how the pandemic impacted rural hospitals. 

“We’ve heard that from states that had expanded and had a lot of hospitals in trouble before,” she said. “They really felt that [Medicaid expansion] was a way that got a lot of their rural small hospital sites out of trouble.” 

Brock Slabach, the director of the National Rural Health Association, worked for 20 years as the CEO of a rural Mississippi hospital. He estimated that between 13 and 15 percent of the people at his hospital had private insurance plans, meaning the other 85 percent had either Medicare, Medicaid, or no other payer but themselves. 

“In my facility, 65 percent of my business was due to one payer and that’s Medicare,” Slabach said. In 2013, because members of Congress couldn’t agree on the budget, the federal government implemented automatic cuts to Medicare reimbursements through a policy called sequestration. The cuts have never been permanently resolved. 

“Any impact that decreases my payment from that source inhibits my ability to maintain solvency as a hospital. So, when you look at sequestration, that’s the prime example.”

The role of Medicare Advantage plans

But, some experts disagree on the level of impact these changes could really have. 

Harold Miller, the director of the Center for Healthcare Quality and Payment Reform and a professor of public policy at Carnegie Mellon, argues that while expanding Medicaid and eliminating sequestration would both be good policy changes for rural hospitals, neither would generate enough new funding to impact a facility’s bottom line. 

“The people who are newly getting Medicaid are only a very small proportion of the thing that’s causing the hospital the loss,” Miller said. “That’s not the problem. The problem is [rural hospitals] actually in many cases are losing money on their privately insured patients.”

Miller’s data show the situation in North Carolina is slightly more complicated than the nationwide trend. It is one of two states where small rural hospitals — meaning facilities with less than $30 million in annual expenses — did not see a decline in payments from private insurers between 2019 and 2020. 

Nationally, though, Miller said small rural hospitals lose money caring for people with private insurance. This includes people who have Medicare Advantage plans.

“Medicare Advantage started many, many years ago because of the notion that private health plans could do a better job of managing people’s health care than the government could,” Miller explained. “A Medicare Advantage plan is required to cover everything that traditional Medicare covers but it has the ability to charge different cost sharing amounts. It has the ability to have networks. It has the ability to do prior authorization.” 

In other words, it looks and acts more like a private health insurance plan than traditional Medicare does.

Traditional Medicare covers 80 percent of costs for most services, potentially leaving a consumer on the hook for 20 percent. That 20 percent gets more expensive as people age and have more health problems. One way people on Medicare get around that cost is by purchasing a supplemental plan, which will cover the 20 percent. The supplemental plan comes with a monthly premium. 

For seniors who don’t have any medical problems, any additional monthly cost can seem like an unnecessary expense, Miller explained. Instead, many will opt for Medicare Advantage plans that often don’t have any premium. But his analysis shows that in many states these plans — along with regular private insurance plans — don’t pay small rural hospitals enough to break even.

“One of the concerns that I have personally about small rural hospitals is that people in their communities may increasingly be signing up for Medicare Advantage plans because they think they’re paying less for that and not realizing that they’re putting their hospital out of business,” he said. 

Miller argues that in order to keep rural hospitals financially afloat, Medicare Advantage plans must be required to pay these facilities at higher rates.

“It would be terrific to assume that we could require Medicare Advantage plans to pay providers more,” said Slabach, from the National Rural Health Association. 

“But that’s a really complicated set of arrangements,” he said. “Congress could say that Medicare Advantage plans have to pay rural providers more. But I guess I’m not really sure if the government would ever do that because that implies that at some point, the government is going to have to pay more because eventually that’s where the money comes from.”

A new payment model

Even though the funds paid by private plans to rural hospitals look better on average in North Carolina than in the rest of the country, Miller argues that the financial systems supporting rural hospitals are so dysfunctional that they need to be fundamentally reimagined.

In his organization’s analysis, they propose a payment structure whereby rural hospitals would receive a fixed payment that would be used to keep critical services up and running, such as the emergency room or a maternity ward, regardless of how much those facilities are used. In addition, as they do now, hospitals would receive regular reimbursements from insurers for the care they provide to people.

“Emergencies vary from year to year: you have a COVID outbreak, you have a natural disaster, a hurricane, you have whatever. All of a sudden, a lot of people need the emergency room and it needs to be there,” Miller said. “In the years when you don’t have those disasters, it may not get enough revenue to cover its costs,” but still it needs to stay open. 

Some say Miller’s model is similar to the new federally designated Rural Emergency Hospital policy, but he says it’s not quite the same. Under the proposal, Rural Emergency Hospitals would receive a fixed amount of funding to stay open and operate their emergency services, but they wouldn’t provide in-patient care, which Miller — and many others — feel are necessary services for community hospitals to offer.

Federal regulators are still working on rules and guidance that would govern Rural Emergency Hospital policy, which goes into effect in 2023.

Whatever you call it, said Mark Holmes, the director of the Sheps Center at UNC, a sustainable payment model for rural facilities will probably look something both like Miller’s proposal and the new Rural Emergency Hospital, with “some chunk of money paying for fixed costs and some chunk of money paying for variable costs.”