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Code red: The financial crisis pressuring America’s rural hospitals


Rural hospitals are facing a crisis.

As the bedrock for the health of their communities, rural hospitals provide high-quality care to nearly 60 million people. They serve as hubs for subject matter experts and are even major employers for the region. The health of a local hospital is often a sign of health for the community.

But now, rural hospitals are closing in startling numbers. According to data from the University of North Carolina, 138 hospitals have closed since 2010, including 20 just last year.

Americans living in rural areas already face a number of health and financial challenges. Rural hospitals shuttering their doors could amplify these issues for years to come.

How does this happen?

There are many factors that may cause a rural hospital to close, such as reduced patient volumes, workforce shortages, and changes to reimbursement rates. COVID-19 has also played a role in shutting rural hospitals down.

Today, we’re going to focus on how the high costs of providing inpatient services are pressuring hospitals to close, and the new financial model the Centers for Medicare and Medicaid Services will be rolling out to help them.

Inpatient services are expensive

When you are admitted to a hospital and stay for more than 24 hours, you’re likely receiving a type of inpatient care service. Childbirth, most rehabilitation services, and routine and complex surgeries are all examples of inpatient care.

Outpatient care is a medical service that doesn’t require you to stay at a facility for long—think X-rays or routine physicals.

Inpatient care can be more expensive for a hospital to provide than outpatient care. According to a hospital cost structure report published in 2020, a hospital’s average total cost of inpatient services is more than double their outpatient costs.

This is because inpatient services often treat more serious conditions and require a team of doctors, technicians, and other professionals to be on hand. The patient is also using up resources like a bed and the time and service of their healthcare team, which hypothetically could be spent treating other patients.

Knowing this, we used data from our HospitalView product to see which states had the most rural hospitals facing financial pressure. Check out the heatmap below for a more detailed illustration.

Fig.1 Data from Definitive Healthcare’s HospitalView database. Data is from the calendar year 2020.

The heatmap shows the number of rural hospitals in each state that are losing money and may need to reconsider their business strategy and the services they offer to stay open. Iowa has the most hospitals in the red at 52. From the data, Massachusetts has only a single rural hospital with negative operating income, closely followed by Florida and Alabama at two each.

It’s important to note that hospitals spend money in a number of different ways: administrative and general costs, labor, laboratory, operating rooms, drugs, and much more. The cost of inpatient care services accounts for more than 10% of total operating costs, according to the hospital cost structure report.

Inpatient care is expensive for patients, too. And the high costs of these services may encourage them to look elsewhere. If the patient volume isn’t around to sustain inpatient services, rural hospitals may find it more difficult to justify keeping them.

While no one can say what the future may hold, these hospitals may have to reconsider how best to serve their communities. Just as a hospital improves the overall wellbeing of the area it serves; a hospital closure leaves the community more vulnerable.

The National Rural Health Association  (NRHA) perfectly outlines the impact a closed hospital could have on its community. To summarize, when a rural hospital closes:

  • Travel time for patients increases.
  • Health care professionals leave the area.
  • The mortality rate in the community increases.
  • The local economy declines.

A new payment model: Rural Emergency Hospitals

In the face of financial pressure, how can rural hospitals carry on without shutting down?

Historically, certain rural hospitals would apply to be designated as a critical access hospital by the Centers for Medicare and Medicaid Services. If eligible, the hospital would receive reimbursements for Medicare services as well as other benefits to help improve its financial situation.

This was met with limited success, and so CMS is rolling out a new “Rural Emergency Hospital (REH)” designation starting in 2023. The program is designed to help rural hospitals become financially stable and serve their community while scaling back costly inpatient services.

The new policy is intended to help hospitals expand and improve their outpatient services. In exchange for cutting back on inpatient programs, these hospitals will get monthly facility payments and a 5% higher Medicare outpatient rate than what full-service hospitals receive.

For now, the healthcare landscape for rural hospitals may appear uncertain. While this new proposal from CMS may help some rural hospitals stay open and serve their communities, it’s not a catch-all solution.

The need for inpatient services won’t disappear when the hospital’s inpatient services program ends. Rural hospitals will need to pay close attention to the health needs of their community and weigh the pros and cons of accepting REH designation.

Interested in finding more insights into how rural hospitals will adapt to the changing healthcare landscape? Request a free trial and get access to unparalleled intelligence from financial and clinical metrics to contact information and more.

Ethan Popowitz

About the Author

Ethan Popowitz

Ethan Popowitz is a Senior Content Writer at Definitive Healthcare. He writes data-driven articles about telehealth, AI, the healthcare staffing shortage, and everything in…

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