COVID-19 And The Financial Viability Of US Rural Hospitals

Editor’s Note:

The June 2020 issue of Health Affairs journal includes the article, “Varying Trends In The Financial Viability Of US Rural Hospitals, 2011–17,” by Ge Bai and colleagues. We asked the authors to put their work in the context of the current coronavirus crisis.  

Approximately 30 percent of general acute care hospitals in the US are rural hospitals, serving sixty million people. Rural hospitals are relatively small (median number of beds: 25). In our recent study published in Health Affairs, we found that between 2011 and 2017, both median overall profit margins and the proportions of profitable hospitals declined for all rural hospital types except for non-profit critical access hospitals (CAHs). (CAHs are rural hospitals that have no more than twenty-five inpatient beds and are located more than 35 miles from another hospital. The Medicare program pays CAHs at 101 percent of their cost for treating Medicare patients.)

Looking state by state, we also found that the median profit margins and the proportions of profitable rural hospitals in most states declined between 2011 and 2017. This is in contrast to the improvement of financial status of urban hospitals during this period. In 2017, rural hospitals had less than half the median overall profit margin of urban hospitals (2.7 percent vs 5.6 percent) and a smaller proportion of profitable ones (64 percent vs. 74 percent).

The COVID-19 pandemic has amplified existing financial pressures on rural hospitals. Below, we discuss our research in more depth. We then describe the impact of COVID-19 on rural hospitals and lay out possible policy responses.          

Occupancy Rate And Charge Markup Are Associated With Rural Hospital Overall Profit Margin

Using multivariate regression analysis, we found that the occupancy rate was strongly associated with rural hospital overall profit margin. In 2017, the bottom one-third of rural hospitals with low occupancy rates (<25.5 percent), as compared to the top one-third with high occupancy rates (>41.4 percent), had much lower median overall profit margins (0.1 percent vs. 4.7 percent). Rural hospitals must provide a range of services to fulfill the requirements established by federal and state accrediting agencies. Those with low occupancy rate, therefore, incur substantial “standby costs” for many infrequently used services, resulting in low financial viability. 

Charge markup was also found to be positively associated with rural hospital overall profit margin. Hospitals with low (<2.0) versus high (>3.3) charge markups had median overall margins of 1.8 percent vs. 3.5 percent. However, raising the charges would impose a higher financial burden on both insured and uninsured rural patients.

Rural hospitals had both lower occupancy rates and lower charge markups than urban hospitals. In 2017, the median occupancy rates of rural vs. urban hospitals were 32.4 percent vs. 57.0 percent; the median charge markups were 2.6 vs. 4.5.

The Financial Impact Of COVID-19 On Rural Hospitals

The financial impact of COVID-19 pandemic on hospitals is twofold. First, similar to urban hospitals, elective services have been cancelled or deferred, due to government executive orders and patients’ concern for exposure to potential coronavirus infection. Second, spending for personal protective equipment (PPE) and other equipment has increased. Lower revenue combined with higher expenses has created financial challenges for hospitals. Rural hospitals, especially non-CAHs, are likely to be particularly vulnerable, considering their small size and the fact that they already had low occupancy rate and thin margin prior to COVID-19. Although rural hospitals have not treated as many COVID-19 patients as compared to their urban counterparts, they too experienced service volume drop, revenue decrease, and higher spending on medical supplies.

To address these financial challenges, the CARES Act authorizes $100 billion of financial relief to hospitals and other health care providers, including a special allocation of $10 billion for rural providers (allocated based on operating expenses). The CARES Act also increases Medicare payments for treating COVID-19 patients, removes the “Medicare sequester,” and expands the Medicare Accelerated and Advanced Payments Program. The Paycheck Protection Program and Health Care Enhancement Act authorizes $75 additional relief funds for hospitals and other health care providers (not yet allocated as of June 7, 2020).  

It is unclear whether congressional relief, designed to provide fast liquidity to recipients’ cash flows, will be sufficient to compensate for COVID-19’s short-term financial impact on rural hospitals. Even if it is sufficient, certain financial risks imposed by COVID-19 will likely remain for a longer period of time. First, the demand for some elective procedures might decline persistently, affecting hospital revenue. Second, hospital operating expense might increase due to higher PPE spending and newly imposed social distancing restrictions. Third, the expansion of telemedicine might lead to lower revenue for rural hospitals as in-person care decreases.

Potential Policy Options For Rural Hospitals

Policymakers aiming to preserve health care access for rural Americans should consider the tradeoff between care access and operational efficiency. As our study suggests, US rural hospitals, with a median size of 25 beds, had a median occupancy rate of only 32 percent. The low occupancy rate indicates rural hospitals’ excess capacity and high standby costs, which raise operating expenses and lead to financial vulnerability.  

One policy option is to expand eligibility for Medicaid. By reducing the uninsured population, Medicaid expansion increases hospital service volume and reduces the potential demand for charity care. We found that CAHs in states that expanded Medicaid eligibility experienced better median overall margin in 2017 than they did in 2011, while those in the states that did not expand Medicaid eligibility experienced worse median overall margin during the same period. The median overall margin of rural non-CAHs declined in both types of states, but to a greater degree in states that did not expand Medicaid eligibility. Therefore, Medicaid expansion benefits rural hospitals financially, especially CAHs. However, Medicaid expansion would not fundamentally solve the excess capacity and low efficiency problems in rural hospitals.  

A second policy option is to make explicit payments to cover the costs for some standby services that are deemed essential but not commonly used. One approach is to focus on just supporting emergency care access in rural areas. Researchers found that approximately half of rural residents bypassed their local CAHs to receive care in a more distant hospital.

The Medicare Payment Advisory Commission (MedPAC) has suggested an outpatient only emergency department model, in which Medicare would cover the operating costs of 24/7 emergency services to support stable access to emergency case. Patients would be stabilized first and, when needed, transported to a larger facility. For remote communities where 24/7 emergency service is not viable, MedPAC suggested a clinic plus ambulance approach, in which Medicare would cover operating costs for primary care visits and ambulance transports. These approaches could solve the excess capacity of inpatient services, but would create a challenge for rural patients, especially older ones, who would end up traveling a long distance for hospital care.

In response to COVID-19, the Department of Health and Human Services lowered regulatory barriers for rural areas. Physicians can care for patients at rural facilities across state lines and via telemedicine; mid-level practitioners can work at rural facilities without satisfying federal minimum personnel qualifications. These regulatory changes, by allowing remotely located physicians to coordinate care with mid-level practitioners, improve staffing flexibility in rural facilities and makes this policy option more cost-effective and feasible.

COVID-19 imposes financial challenges on rural hospitals that were already struggling prior to the pandemic. Structural changes are needed to fundamentally improve rural hospital financial viability. With the staffing flexibility created by recent regulatory changes, paying for standby services has the best potential to balance rural care access and operational efficiency.