Rural Hospitals: Federal Leadership and Targeted Programs Needed

Published by the Government Accountability Office on 1990-06-12.

Below is a raw (and likely hideous) rendition of the original report. (PDF)


                  United   States   General   Accounting        Office   .L

                  Report to the Chairman, Committee on * ’
                  Appropriations, House of

,.’   June 1990
                  RURAL HOSPITALS
                  Federal Leadership
                  and Targeted
                  Programs Needed
MO   Egz&+~~~
     Human Resources    Division


     June 12.1990

     The Honorable Jamie Whitten
     Chairman, Committee on Appropriations
     House of Representatives

     Dear Mr. Chairman:

     In response to your request, we have identified and reviewed programs targeted at assisting
     rural hospitals. This report provides information on federal, state, and hospital programs
     that address problems for rural hospitals. Recommendations to the Secretary of Health and
     Human Services and matters for congressional consideration are included in the report.

     We are forwarding copies of this report to the Secretary of Health and Human Services and
     other interested parties.

     This report was prepared under the direction of Janet L. Shikles, Director, Health Financing
     and Policy Issues, who may be reached on [202) 275-5451 if you have any questions about
     the report. Other major contributors are listed in appendix VI.

     Sincerely yours,

     Lawrence H. Thompson
     Assistant Comptroller General
                                  Multiple, interrelated factors contribute to the financial distress of at-
Results in Brief                  risk rural hospitals. Compared with successful small rural hospitals, dis-
                                  tressed ones have fewer patients on average per day, less technology, a
                                  more limited scope of services, and higher costs per discharge.

                                  At least 10 federal initiatives address problems facing rural hospitals
                                  either directly or indirectly. But despite these efforts, a number of rural
                                  hospitals that are the sole source of care within a community are finan-
                                  cially distressed and at risk of closure. Many other rural hospitals also
                                  are financially distressed and have not fully benefited from federal ini-
                                  tiatives. Problems remain, due in part to shortcomings in program
                                  design, inadequate targeting, insufficient publicity, and a lack of effec-
                                  tive monitoring.

                                  Many state governments and hospital administrators have attempted to
                                  address the problems of rural hospitals. Their strategies vary considera-
                                  bly. While many of the efforts appear promising, little information is
                                  centrally available on their relative merit or impact. Rural hospitals
                                  would benefit from the federal government facilitating an exchange of
                                  information among states and hospital administrators.

Principal Findings

Multiple Problems Affect          The problems faced by rural hospitals can be categorized broadly as
Survival of Rural Hospitals
                              l low patient volume. which results in higher costs per case;
                              l difficulty competing for patients and physicians due to a limited scope
                                of services and fewer technological resources;
                              l limited patient and nonpatient revenues; and
                              . regulatory constraints.

                                  As a result, the financial viability of many rural hospitals is threatened.
                                  (See p. 15.)

Federal Programs Need             The federal initiatives that address rural hospitals’ problems do so by
Monitoring and Focus              (1) helping them lower their costs per patient, (2) recruiting physicians
                                  to underserved areas, (3) increasing their Medicare reimbursement, or
                                  (4) providing grant funding and general assistance. But problems

                                  Page 3                                             GAO,OIRD-9087   Rural Hospitals

                  Many rural hospital administrators are implementing strategies to
                  (1) modify services or staffing, develop outreach programs, (2) recruit
                  health professionals, or (3) obtain new technology or adopt new
                  management programs. Rural hospitals are also joining together in local
                  alliances and in group purchasing organizations. The consolidated
                  purchasing power from these organizations has enabled some hospitals
                  to reduce their costs for supplies and equipment.

                  While many of the hospital-initiated activities are widely used, others
                  reflect unique approaches to long-standing problems. Since little central-
                  ized information is available on the outcome of these efforts, hospitals
                  and state officials are not able to build on success and avoid failure. (See
                  p. 36.)

                  Because of the rapid changes occurring in the health care industry and
Recommendations   the complexity of the problems facing rural hospitals, it is unrealistic to
                  expect that every rural hospital will remain open as a full-service,
                  acute-care facility. To help preserve rural residents’ access to hospital
                  care and achieve greater impact from the many efforts underway, GAO
                  recommends that the Secretary of HHS(1) improve the monitoring of and
                  technical support provided to sole community hospitals and (2) assure
                  that ORHPhas the resources to monitor and evaluate the impact of fed-
                  eral efforts that assist rural hospitals. (See p, 49.)

                  If congressional intent is to preserve rural residents’ access to hospital
Matter for        care, the Congress should require that essential rural hospitals that are
Congressional     financially at risk be given priority when applying for federal grants to
Consideration     assist rural hospitals. Gee p. 50.)

                  HHSdisagreed with GAO'Sassessment of HHS'Srole in evaluating the pro-
Agency Comments   grams and provisions that assist rural hospitals. HHS,however, did not
                  present evidence that caused GAOto substantially alter its major finding
                  on this issue. HHSalso disagreed with GAO'Sdraft recommendations (1) to
                  refine the SCReligibility criteria and (2) to give essential, financially at-
                  risk rural hospitals priority when they apply for federal grants. GAO
                  considered HHS'Scomments in finalizing the report and the

                  Page5                                               GAO/HRD90-67

Chapter 5                                                                                        48
Conclusions,         Conclusions
                     Recommendations to the Secretary of HHS
Recommendations,     Matter for Congressional Consideration                                      50
Matter for           Agency Comments and Our Evaluation                                          50
Consideration, and
Agency Comments
Appendixes           Appendix I: Distribution of Rural Health Clinics by State                    56
                     Appendix II: Rural Hospitals’ Isolation and Financial                        57
                         Status (FY 1985-87)
                     Appendix III: Distribution of Transition Grant Awards by                     59
                         State (1989)
                     Appendix IV: Opinions of Rural Hospital Administrators                       60
                     Appendix V: Comments From the Department of Health                           66
                         and Human Services
                     Appendix VI: Major Contributors to This Report                               77

Tables               Table 3.1: Major Rural Hospital Problems Addressed by                        21
                         Federal Initiatives
                     Table 4.1: State Initiatives That Assist Rural Hospitals                     39
                     Table 4.2: Recruitment and Retention Activities Reported                     42
                         by Rural Hospitals (1989)
                     Table 4.3: Benefits Reported by Rural Hospitals From                         46
                          Membership in an Alliance

                      Page 7                                         GAO,‘HRLb9O87   Rural Hospitals
Page 9   GAO/HRDVMV   Rural Hospitals
                         Chapter 1

                         Concern about growing health care costs led the Congress, in 1983, to
                         establish a prospective payment system (PPS) for hospital inpatient ser-
                         vices provided to Medicare beneficiaries. The intent was to control costs
                         by giving hospitals financial incentives to deliver services more effi-
                         ciently and reduce unnecessary use of services. Under Medicare, PPS
                         pays hospitals a predetermined amount for each patient diagnosed with
                         a similar problem.2 PPSincreases a hospital’s financial risk since it is
                         reimbursed a fixed amount regardless of the cost of treating the patient.

                         From 1980 to 1988,408 U.S. hospitals closed-half in rural areas.
                         Although the majority of rural hospitals are financially viable, more
                         than a third incurred losses in fiscal year 1987, and about 1 in 8 had
                         losses in 3 consecutive years (fiscal years 1985-87).R Small rural hospi-
                         tals are disproportionately represented among closed hospitals and hos-
                         pitals that are financially at risk. While about three-quarters of all rural
                         hospitals have fewer than 100 beds, over 90 percent of the closed or
                         financially at-risk hospitals had fewer than 100 beds.

                         In this report, we provide an assessment of the problems confronting at-
Objectives, Scope, and   risk hospitals and the strategies/programs that attempt to address these
Methodology              problems. Another GAOreport, soon to be issued, will present findings
                         from a more in-depth analysis of the extent to which Medicare and other
                         factors contribute to the financial distress of rural hospitals.

Objectives and Scope     Our objectives were to identify and describe programs and initiatives
                         that may increase the chances of survival for rural hospitals considered
                         at risk of failure. We examined federal, state, and hospital-based pro-
                         grams that addressed problems of rural hospitals.

                         Of the numerous programs and activities that target rural health care
                         concerns, this report discusses only those having an impact on
                         nonfederal, short-term general rural hospitals. For the purpose of this
                         report, rural hospitals are defined as those located outside a metropoli-
                         tan statistical area.3 We selected particular programs by assessing their

                          “Thepredetermined  amountis basedontheaveragecostof treatingthat typeof patientandadjusted
                          for somesourcesnf hospitalcostvariation,includinglocalwages,patientmix,teachingstatus,and
                          “Whenfiscalyeardataarecitedm this report,wereferto hospitaldatafor costreportingperiods
                          beginningduringthat fiscalyear
                          “This ISthedefinitionof rural gewrallyusedby Medicare’s

                          Page 11                                                     GAO/lfRB9O87   Rural Hospitals
Chapter 1

Administration’s Area Resource File, the Medicare Cost Reports, and a
computerized file developed for the Prospective Payment Assessment
Commission by a private consulting firm, SysteMetrics/McGraw-Hill,

To obtain the views of rural hospital administrators, we mailed a ques-
tionnaire in the fall of 1989 to a random sample (n=360) of all rural
hospital administrators identified in the 1987 AHA survey (N=2,634).
Sixty-seven percent of the hospitals responded. Because local alliances’
are increasingly used as a survival strategy by rural hospitals, we
mailed the same questionnaire to administrators of all (N=77) rural hos-
pitals participating in selected alliances in five states (Kansas, Nevada,
Mississippi, Vermont, and Wisconsin). The response rate was 68 percent.
We asked administrators in both groups for information on their hospi-
tal’s characteristics (e.g., bed size and ownership) and strategies for
survival. In addition, we asked them to identify any constraints or chal-
lenges faced by their hospitals.

From discussions with rural health care experts and a search of the
literature, we identified federal programs that assist rural hospitals. We
included all programs that specifically target rural hospitals for special
consideration. As a result of these efforts, we identified seven program-
matic efforts under the Health Care Financing Administration (HCFA),
two initiatives administered by the Public Health Service (PHS), and a
new program recently authorized by the Omnibus Budget Reconciliation
Act of 1989 (OBRA89). We interviewed officials representing HCFAand
PHS.While not attempting a comprehensive evaluation of each program,
we identified issues of concern that may require congressional attention.

 Because of concern about the impact of closures on access to care, we
 reviewed Medicare’s sole community hospital (SCH) provision.x This pro-
 vision assists rural hospitals that are the only source of care reasonably
 available to Medicare beneficiaries. We interviewed HCFAofficials at
 headquarters, telephoned HCFAofficials in each regional office, reviewed
 SCHapplication files at two HCFAregional offices, used national data
 bases to analyze the financial status of SCHs,and telephoned selected
 hospital officials. Also, we reviewed administrative appeal decisions and
 court cases related to the SCHstatus.

 ‘A stateor localnetworkof hospitalsthat seeksto further thecommon
                                                                 interestof its members.
 XOriginallyauthorizedby swtmn223of the 1972SocialSecurityAmendments.

 Page 13                                                    GAO/HRD-90.67   RuralHospitals
Chapter 2

tinstraints and ChallengesFacing
Rural Hospitals

                             Understanding the underlying causes for the financial distress of so
                             many rural hospitals is a necessary first step in assessing whether fed-
                             eral, state, and hospital strategies are effective in addressing problems.
                             Using our comparison of successful and distressed hospitals, a literature
                             review, and information obtained from a survey of rural hospital admin-
                             istrators, we categorized rural hospitals’ problems into four areas:

                         l low patient volume, which results in higher costs per discharge;
                         . lesser ability to compete for patients and physicians due to a limited
                           scope of services and fewer technological resources;
                         l limited patient and nonpatient revenues; and
                         l regulatory constraints.

                             These problems are interrelated, and their underlying causes vary. Their
                             combined impact, however, is to restrict rural hospitals’ flexibility in
                             responding to a changing environment and, for many, to threaten their
                             financial viability.

                             Very low patient volume is a direct cause of financial distress. Hospitals
Low Patient Volume           with few patients experience higher costs per patient, because certain
Raises Costs, Leads to       costs, such as those for equipment maintenance and wages of core
Financial Distress           employees, are fixed and are difficult or impossible for hospital adminis-
                             trators to control. For example, rural hospitals with fewer than 50 beds
                             and very low patient volume (lo- to 20-percent occupancy rates) had
                             average costs per patient about 9 percent higher than those with higher
                             patient volume (20- to 29-percent occupancy).l

                             While low patient volume is a direct cause of financial distress, it is usu-
                             ally the result of a combination of other factors. These include (1) low
                             population density in the surrounding area, (2) inadequate supply of
                             physicians in the community, and (3) patients’ preferences to go else-
                             where. As the primary reasons for low patient volume likely differ from
                             location to location, it is unlikely that a single remedy will be appropri-
                             ate nationwide.

                             On average, hospitals with very low patient volume (less than 10 inpa-
                             tients on the average day) were located in areas with lower population
                             density and were more likely than other hospitals to be over 35 miles
                             from the nearest hospital. This suggests that in some instances the hos-
                             pital’s community may be too small to increase patient volume, thus

                             ‘Therewere233and286rural hospitalsin thelowerandhigheroccupancy

                             Page15                                                 GAO/HRD-9047
                               Chapter 2
                               Constraints   and Challenges   Facing
                               Rural Hospitals

                               Similarly, physician malpractice concerns have been a major factor in
                               limiting obstetrical services. Many rural hospitals have discontinued
                               such services, survey responses indicate, and more are considering it.
                               Such actions are mainly due to physician decisions to discontinue pro-
                               viding obstetrical services because of professional liability concerns.

                               Keeping their hospitals technologically current was another major chal-
                               lenge for rural hospital CEOS we surveyed. Specifically, survey respon-
                               dents cited difficulties in modernizing buildings and equipment, largely
                               because of problems in acquiring capital. Hospitals making profits can
                               save for future capital needs; however, the many that are breaking even
                               or losing money must seek funds through local government subsidies,
                               fund-raising, loans, or bond issues.

                               Small rural hospitals’ median costs per patient were about 20 percent
Limited Hospital               higher for distressed hospitals than for successful hospitals. Some suc-
Revenues Reduce                cessful hospitals also experienced high costs per patient, but were better
Profitability                  able to cover their higher costs with higher revenues. Among the factors
                               that can limit hospital revenues are (1) its patient/payer mix, (2) Medi-
                               care’s PFS,and (3) the community’s economic environment.

High Proportions of            The patient mix of distressed small rural hospitals is characterized by
Medicare and                   higher proportions of Medicare patients and uncompensated care.4 At 34
                               percent of the distressed hospitals, Medicare inpatient days accounted
Uncompensated Care Limit       for over 60 percent of all inpatient days in fiscal year 1987. This was
Hospital Revenues              the case at only 21 percent of the successful hospitals. Further, dis-
                               tressed hospitals’ uncompensated care amounted to 5.4 percent of their
                               patient charges in 1987, compared with a median of 3.7 percent for suc-
                               cessful hospitals.”

                               As a result, distressed hospitals had fewer patients for whom they were
                               assured of recovering the full cost of treatment. Hospitals often face lim-
                               ited revenue from other payers as well, but hospital administrators
                               expressed most concern over Medicare’s payment policies.

                                            careumsistsof baddebtandcharitycare.

                                Page 17                                            GAO/HRD9@67   Rural Hospitals
                       Chapter 2
                       Constmtints and Challenges   Facing
                       Rural Hospitals

                       Hospitals in areas with low per capita income or high or increased
                       unemployment rates are more likely to be financially distressed. For
                       example, counties with increases in unemployment of 4 or more percent-
                       age points had nearly twice as many distressed hospitals as counties
                       with declines in unemployment. Communities with these characteristics
                       are likely to face fiscal pressure due to a relatively low or declining tax
                       base and increased demands on public funds. Thus, they are likely to be
                       less willing or able to subsidize a hospital than communities with less
                       fiscal pressure and stronger economies. Private funds, such as endow-
                       ments, in these communities also may be more scarce.

                       State CON requirements, hospital licensure, and provider licensure and
Regulatory             certification requirements were viewed as significant constraints by
Constraints: A Major   rural hospital CEOS we surveyed and interviewed. These administrators
Concern to Hospital    reported that such requirements add administrative cost (for example,
                       staff time spent complying with paperwork requirements) and restrict
Administrators         the types and level of staffing, further contributing to rural hospitals’

                       State CON requirements were viewed as inequitable because they require
                       hospitals to undergo a review procedure to establish the need for new
                       technologies, but may allow physicians or private enterprises to
                       purchase equipment without such review. This gives physicians or pri-
                       vate enterprises that acquire such equipment an advantage in competing
                       for patients.

                       Certification requirements also were the subject of concern for many
                       hospital administrators surveyed. Specifically, administrators told us
                       that it was difficult for them to comply with licensure and certification
                       standards requiring a minimum level of staffing. They believed these
                       standards were geared more toward larger hospitals and consequently
                       were overly stringent given the scope and nature of their operations.

                       Some administrators expressed concern about state regulations that
                       restrict their ability t.o use certain types of health professionals. In some
                       states, licensure requirements make it difficult for hospitals to employ
                       technicians who are cross-trained to perform two functions, such as lab
                       and X-ray. The use of cross-trained technicians, such as lab or X-ray
                       technicians, could allow hospitals to reduce their staff without reducing

                        Page 19                                           GAO/HRBW67   Rural Hospitals
                                                Chapter 3
                                                Federal Programs Need Targeted        Approach
                                                to Help At-Risk Rural Hospitals

Table 3.1: Major Rural Hospital   Problems   Addressed    by Federal    Initiatives
                                                                                               Problem addressed
                                                                   Low patient                 Limited        Recruitment of
                                                            volume/high fixed                inpatient            health care           Multiple
Initiative                                                                 cost               revenue          professionals         problems’
Sole Community Hospital Prowsion                                               X                       X
Essential Access Community Hospital Program                                    X-                      X                                           X
Rural Health Clonic Act                                                        x                                             X
MedIcal Assistance Facility Demonstration                                      x                                             X
Transltion Grant Program                                                                                                                           X
Rural Referral Center Prowlon                                                                         X
Lugar Prowsion                                                                                        X
NatIonal Health Sewce Corps                                                                                                 X
Offlce of Rural Health Policy                                                                                                                      X
Swing Bed Program                                                                 X                   X
                                                aProvldes grant money or yencral assistance to rural hospitals

                                                A major federal effort designed to assist essential rural hospitals is the
The Sole Community                              SCHprovision. It offers a special Medicare payment rate to rural hospi-
Hospital Provision:                             tals that provide the sole source of care reasonably available to Medi-
Insufficient to Protect                         care beneficiaries. It has been ineffective, however, in protecting these
                                                hospitals from large Medicare losses. Furthermore, many of these hospi-
Essential Hospitals                             tals are in financial distress and at risk of closure because they are los-
From Risk of Closure                            ing money on both Medicare and other patients.

                                                Improved payment made possible by the Omnibus Budget Reconciliation
                                                Act of 1989 (OBRA ~1 (P.L. 101-239) should alleviate large losses under
                                                Medicare. However, many of these distressed KXIS likely will remain
                                                financially troubled and may need broader assistance to protect commu-
                                                nity residents’ access to care.

Reimbursement Improved,
but Some SCHs Remain in
Financial Jeopardy
                                                tinder Medicare’s WI provision, designated hospitals may receive Medi-
                                                care payment that ( I ) considers their historic cost of treatment, rather
                                                than the average cost of treatment; (2) reimburses 100 percent of their
                                                capital costs, rather than a fraction; and (3) allows for increased pay-
                                                ments in some cases when a hospital experiences more than a 5-percent
                                                decline in discharges.

                                                Page 21                                                          GAO/HRB90-67    Rural Hospitals
                                            Chapter 3
                                            Federal Progmw    Need Targeted       Approach
                                            to Help At-Risk Rural Hospitals

                                            by shifting from HCFA central office to fiscal intermediary application
                                            approval. HCFA now plans to issue instructions on all provisions regard-
                                            ing SCHS, which presumably will clarify the provisions for future

                                            Improved awareness of the volume adjustment and SCH provision, and
                                            increased Medicare payment as a result of OBFLA 89, will help some essen-
                                            tial hospitals, However, many SCHS with fewer than 50 beds likely will
                                            remain at risk of financial failure due to losses on non-Medicare busi-
                                            ness. In fiscal year 1987, SCHS with fewer than 50 beds were far less
                                            profitable than other hospital groups, as fig. 3.1 shows.

Figure 3.1: Overall Profitability of SCHs
and Other Rural Hospitals (Flscal Year






                                                 6-49                  5049                  loo-199          zoo+
                                                 Bed eke

                                                 I         SoleCommunityHospitalsDesignatedDuring1983-1987
                                                           Other RuralHospitals

                                            Note Total margin ISa measure of overall profitablhty calculated (total revenue - total cost)/ total
                                            Source GAO analysis based on MedIcare Cost Reports and SCH deslgnatlon data provided by HCFA

                                             Page 23                                                           GAO/HRD9087       Rural Hospitab
                           chapter 3
                           Federal Program   Need Targeted   Approach
                           to Help At-Risk Rural Hospitals

                           applicants know how their application will be evaluated and what docu-
                           mentation is required to prove eligibility. Of the 26 (likely eligible, but
                           not designated) hospitals we called, 7 did not know about or misunder-
                           stood the current XII designation criteria.

                           Because record keeping and reporting on SCHapplications and decisions
                           are not required, HCFAhas limited information on the problems encoun-
                           tered by applicant hospitals. Such information could serve as a basis for
                           improving program instructions. In the two regions we visited, better
                           instructions might be helpful to applicant hospitals, since many hospi-
                           tals that were denied later were approved. Lacking explicit guidance,
                           some hospitals have paid consultants to assist them in preparing an
                           application requesting SCII designation and in guiding them through the
                           process. Two hospitals that used consultants spent almost $10,000 each.

                           The Essential Access Community Hospital program, created by OBRA89,
New Legislation Offers     may also help essential rural hospitals by providing ways to increase
Alternative                their patient volume and Medicare revenue. It offers essential access
                           hospitals a different designation and provides for new grant money to
Designation, Increased     establish a program t.o assist designated rural hospitals in seven states.
Support for Essential      The major features of the program include the following:
Hospitals              .   Criteria for designating essential access hospitals that differ from SCH
                           criteria. Unlike scn criteria, close proximity to a limited-service hospital
                           does not disqualify a hospital from eligibility.
                       .   Designation of a new type of facility. Called “rural primary care hospi-
                           tals,” these facilities will provide 24-hour emergency care but generally
                           limit inpatient medical care to those patients requiring stabilization
                           before discharge or transfer to a hospital.
                       .   An important role for states, which must develop a state rural health
                           care plan and designate essential access hospitals in order to qualify for
                           a grant.
                       .   Formation of “rural health networks” to link rural hospitals through
                           communication systems and patient referral and transfer agreements.
                           One effect may be to strengthen essential access hospitals by increasing
                           their patient volume through increased referrals and transfers.
                       .   Grants available to designated essential access hospitals, as members of
                           a rural health network, to improve their communications systems and
                           emergency transportation systems.

                           If funds are appropriated, the new program will offer broader assis-
                           tance than the SCII provision to essential access hospitals. Also, it

                           Page 25                                            GAO/HRD90+7   Rural Hospitals
    Chapter 3
    to HelpAt-RiskRural Hospitals

    app. I).? This suggests that hospitals face particular barriers in estab-
    lishing RHCS.

    To identify barriers to growth of RHCS,during 1988 ORHPinterviewed
    rural health interest groups, clinic officials, and federal and state offi-
    cials. Rural health experts believe the findings apply to the lack of
    growth of both provider-based (that is, hospital) and independent clin-
    ics. Barriers identified through the study were

. lack of publicity and information about the RHCprovisions;
. restrictive state nurse and medical practice acts, which discourage the
  establishment of RHCS;
l clinic difficulties in recruiting and retaining the services of nurse practi-
  tioners or physician assistants;
l delays in obtaining Medicare certification;
. little technical support available to assist small clinics in setting up the
  record-keeping system required to complete the Medicare Cost Reports;
l the amount of time and paperwork required to get an area designated as
  medically underserved discourages the establishment of new clinics.

    Thus, it appears from this study and other@ that a government provi-
    sion to assist rural communities in existence for 10 years has been used
    only minimally because of problems in implementing it. OBRA 89 requires
    HHSto distribute information about RHCSto states and health care facili-
    ties. It also reduces the amount of time a mid-level practitioner must be
    present from 60 to 50 percent. While improved information should cor-
    rect one of the major problems identified, problems regarding use of
    mid-level practitioners are complex and likely will persist despite the
    relaxed staffing requirements in OBM89. State regulations regarding use
    of mid-level practitioners vary considerably. Thus, policies defined by
    both federal and state governments will determine the extent to which
    the intent of the RHCact is realized within a particular state.

    7Ekcausethenumberof RIICsoperatedby a hospitalwasunavailablefromHCFA’scentraloffice,we
    contactedeachregionalofficefor this information.
    ‘Otherstudieswereconducted by the SubcommitteeonRuralDevelopment   of theSenateAgriculture,
    NutritionandForestryCommittee  (19791,the HHSOfficeof theInspectorGeneral(1979),andGAO

    Page27                                                     GAO/HRB9&67RuralHospitals
                             FederalPro@am        Need Targeted   Approach
                             to Help At-Risk   Rural Hospitals

                             risk or essential hospitals, such criteria were not precluded by the

                             Since federal grant funds are limited, including the essential nature and
                             financial status of a hospital in review criteria may provide better use of
                             federal moneys. Of 2,361 rural hospitals, 766 had net financial losses
                             during the 3-year period covering fiscal years 1985437. Of these hospi-
                             tals, 119 had both net financial losses and appeared to be isolated-that
                             is, the sole source of care within a geographic area (see app. II). When
                             we reviewed the transition grant awards, we found that only 15 of the
                             119 financially distressed and isolated hospitals received grants. How-
                             ever, 37 financially secure”’ hospitals received grants. While many of
                             the at-risk hospitals may not have applied for a grant, HCFA’Sbroadly
                             defined funding criteria did not give priority consideration to these hos-
                             pitals. Without some effort to target funding, financially secure hospi-
                             tals may receive federal support at the expense of essential, financially
                             at-risk hospitals.

Medical Assistance           In June 1988, HCFAawarded the Montana Hospital Research and Educa-
Facilities: Reimbursement    tion Foundation a planning grant to design a demonstration and evalua-
                             tion of a new category of rural health care facility-the   medical
Issues Present a Challenge   assistance facilitv. The MAF demonstration project will test the feasibil-
                             ity of a facility that would provide emergencycare to ill or injured
                             patients before their transfer to a hospital or inpatient medical care for
                             96 hours or less. A rural hospital could become a MAF if it was located at
                             least 35 road miles from the next nearest hospital and in an area with
                             fewer than 6 people per square mile. While admissions would require
                             physician approval, much of the day-to-day care of the patients would
                             be provided by a I~X practitioner or physician assistant.

                             The successful implementation of the MAF project is important because
                             the Congress established a similar type of facility, called a “rural pri-
                             mary care hospital,” through the Essential Access Community Hospital
                             Program in OHKA8s (see p. 25). That program expands the MAF concept to
                             seven states and, if funds are appropriated, will provide grants that hos-
                             pitals may use to convert to the new type of facility or to become part of
                             a rural health net.work.

                              “‘Wedefinedfnxuwally x’wn~M :I 3-yearaveragetotal marginin thetop 25percentileof rural

                              Page 29                                                    GAO/HRL%90-67   Rural Hospitals
                                                        Chapter 3
                                                        Federal Prorpmw Need Targeted        Approach
                                                        to Help At-Risk Rural Hospitals

                                                         If recent trends continue, the number of                 NHSC    placements, urban and
                                                         rural, will continue to decline.

                                                         Until recently, the Corps’ primary recruiting tool was a scholarship pro-
                                                         gram that gave medical students tuition assistance. Upon completing
                                                         residency training, scholarship recipients were to repay NHSC with ser-
                                                         vice in a health manpower shortage area. But the supply of scholarship
                                                         recipients is declining (see fig. 3.2) because relatively few new scholar-
                                                         ships have been awarded since fiscal year 1985.

Figure 3.2: Number of Scholarships              and Year First Available
1860          Scholmhip     Reclpl~nl~











       1977          1978      1979      1980   1991     1982       1983    1984      1985      1988      1997     19s9      1989      lee0      1991      1992
                                                         Note Includes physlclans and other types of health professionals (for example, denteAs, nurse practi-
                                                         t!oners, doctors of osteopathy)
                                                         Source Based on data provided by PHS

                                                         In testimony before the House Subcommittee on Health and the Environ-
                                                         ment (Feb. 1987) a ITS official stated that NHSC is being reduced because
                                                         the Corps’ past successes and the natural diffusion of physicians into
                                                         shortage areas has made it unnecessary to place as many health profes-
                                                         sionals as in the past. NHSCnow is shifting its fiscal and operational
                                                         focus from federal to state administration, and its recruiting mechanism
                                                         from a scholarship program to a loan repayment program.

                                                          Page 31                                                             GAO/HRB9O-67      Rural Hospitals
                      FederalPro@m~~Need        Targeted   Approach
                      to Help At-Risk   Rural Hospitals

                      referral centers and the Lugar provision, lZhave eligibility criteria that
                      qualify relatively few hospitals for the special reimbursement. The third
                      reimbursement mechanism, the Swing Bed Program, permits hospitals
                      with fewer than 100 beds to temporarily use acute-care beds for long-
                      term care patients.

                      Rural referral centers are paid based on Medicare’s standardized pay-
                      ment amount for hospitals in smaller urban areas (P.L. 98-21). A rural
                      hospital qualifies as a rural referral center if it meets a set of conditions
                      related to bed size or the level of discharges and the complexity of cases
                      treated. As of 1989, 226 hospitals were reimbursed as rural referral cen-
                      ters. Their higher ws reimbursement rates have resulted in these hospi-
                      tals, as a group, earning higher profits on their Medicare patients than
                      any other category of rural hospitals.

                      The Lugar provision, enacted in 1988, allows hospitals in a rural county
                      adjacent to one or more urban areas to be treated, for reimbursement
                      purposes, as if located in the metropolitan statistical area to which the
                      largest percentage of workers in the county commute. As of January
                      1989, 29 counties were redesignated under the Lugar provision, allowing
                      53 rural hospitals to be reimbursed at a higher urban rate.

                       Through the Swing Bed Program, rural hospitals with fewer than 100
                       beds’:’ are allowed to temporarily use acute-care beds as skilled nursing
                       beds. The program allows a rural hospital to be reimbursed for skilled
                       nursing services provided to Medicaid or Medicare beneficiaries and
                       intermediate care services provided to Medicaid beneficiaries. Hospitals
                       are reimbursed on a per diem basis according to each state’s average
                       Medicaid rate. The American Hospital Association survey of hospitals
                       identified 1,056 community hospitals participating in the Swing Bed
                       Program as of 1988

                       The HCFA and PHSefforts described in the preceding sections are not well
Coordinating Office    linked, sufficiently monitored, or evaluated for their combined impact
Should Determine       on rural communities. Five of the federal efforts are structured to pro-
Impact of Federal      vide additional Medicare payments to hospitals that meet eligibility cri-
                       teria. For these payment provisions, administrative effort is focused on
Efforts                such activities as eligibility determinations and little effort is placed on

                       ‘%bk Law 100-203,
                                      inlr~~i~wdby SenatorKichardLugar.
                       “‘Whenongmallycnacwd111 1980(PI,. 96.499),theprogrammctudedonly rural hospitalswith
                       fmwr than50beds.In 1987I’% IOO-203 expandedeligibilityto hospitalswith fewerthan 100beds.

                       Page33                                                    GAO/HRD-9087    Rural Hospitals
Chapter 3
Federal FIo@um     Need Targeted   Approach
to Help At-Risk Rural Hospitals

Our review suggests that HHScould better use ORHPin monitoring and
evaluating federal rural health initiatives. Although ORHPhas broad
responsibility for rural health issues, we found no evidence that it had
been directed to assess the impact of federal efforts that assist rural
hospitals, or that it had the resources to do so. Although the units
responsible for program implementation ultimately must support pro-
gram changes, ORHPis in a unique position to independently assess the
operations and combined impact of federal initiatives and to develop
recommendations for change that would further national rural health
policy goals. To the extent that ORHPis to be a credible resource in advis-
ing the HHSSecretary on rural health policy, it must be well informed
about the operations and impact of departmental rural health

Page36                                            GAO/HRBQO87   Rural Hospitals
                               Chapter 4
                               States and Hospitals Undertake   Strategies   to
                               Assist Rural Hospitals

                               education loan repayment programs for physicians and nurses and initi-
                               ated a rural family practice project to attract physicians to rural areas.
                         l     Oregon targets assistance to hospitals with fewer than 50 beds. Health
                               professionals affiliated with these hospitals are eligible for a tax credit,
                               a loan forgiveness program, and continuing education opportunities.
                               Further, these hospitals are eligible for capital improvement grants and
                               for loo-percent reimbursement of their Medicaid allowable costs. Addi-
                               tionally, Oregon Health Sciences University may reserve up to 15 per-
                               cent of the positions in each medical school class for students who agree
                               to serve in rural areas.
                         l     Washington has established a rural health system project that provides
                               financial and technical assistance for up to six project sites. In choosing
                               project sites, the state will consider areas with less-than-adequate access
                               to health care and sites with a financially vulnerable hospital. Other
                               assistance provided by Washington to rural hospitals includes authori-
                               zation of a new category of health facility and a loan repayment pro-
                               gram for physicians and nurses.
                             . California has established a state demonstration project to test the con-
                               cept of hospital conversion for small rural hospitals. All three of the
                               demonstration hospitals are located in Health Manpower Shortage
                               Areas. The Alternative Rural Hospital model is based on a “building
                               block approach,” in which the needs of the individual community deter-
                               mine the scope of services.

Other States Provide           Although not attempting to develop comprehensive programs, some
Assistance in Selected         states provide assistance to rural hospitals in selected areas or are con-
                               sidering such efforts (see table 4.1). Almost half of the states have
Areas                          established an office of rural health (located in a state agency or spon-
                               sored by a university). Other strategies proposed and adopted by state
                               governments include: (1) regulatory reform, (2) financial assistance,
                               (3) physician recruitment, (4) medical liability remedies, and (5) techni-
                               cal assistance.

                               Regulatory reform efforts include changing requirements for the licens-
                               ing of services (that is, for hospitals and alternative facilities) and for
                               CON review. Financial assistance efforts provide support to hospitals for
                               capital improvements, service modifications, and intervention when clo-
                               sure appears imminent.’ Physician recruitment efforts primarily use

                               ‘For example,a 1989repm-tt,othestatelegislatureby theMinnesotaDepartment of Healthrecom-
                               mendsestablishmentof Bhospitalsubsidyfundto preserveaccess to healthcarein geographically

                               Page 37                                                    GAO,‘HRB9067    Rural Hospitals
                                                Chapter 4
                                                States and Hospitals Undertake     Strategies   to
                                                Assist Rural Hospitals

Table 4.1: State Initiatives   That Assist Rural Hospitals
                                   Office 0;:~;;;       Ww~o;~                 Financial            Physician             Medical              Technical
State                                                                        assistance           recruitment             liability           assistance
Arizona                                        X                    X                                                                 X
Arkansas       -                               X                    X                      X                                                                 X
Callfornla                                     X                    X                      Xb                                         X                      X
Colorado                                                            X
Florlda                                                             X                      X                    XC                    X                      X
Georgia                                        X                    Xa
Hawaii                                                                                                                                X
Idaho                                          X
llllnOlS                                       X
Iowa                                                                Xa                     X               -                                                 X
Kansas                                         X
Kentucky                                                                                                                              Xa
Maine                                                                                                           XC                    Xb                     X
Minnesota                                              ~~                                  Xa
MISSISSIPPI                                    X”
Missourl                                                                                                                              X
Montana                                        X                     X                                                                X
Nebraska                                       X                                                                X
Nevada                                         X                     X                                          X
New Mexico                                     x                                                                XC
New York                                                                                   X                                          Xa                     X
North Carolina                                 X                     X                                          XC                    X                      X
North Dakota                                   x                                                                                      X                      X
Oklahoma                                                                                                                                                     X
Oregon                                         X                     X                     X                    x                                            X
South Carolina                                                       X                                          XC
South Dakota                                   X                                                                                                             X
Texas                                          X                     X
                                                                                                                .-XC                  X
Utah                                           X                     Xa                                                                                      X
Vlrainla                                                                                                                              X
Washington                                     X                     X                     X                                          X                      X
West Virglnla                                                                                                   XC                    X                      X
Wlsconsm                                       x       ~~            X                     X
Wyoming                                                              X
                                                   ‘Study being completed
                                                   ‘NatIonal Health Serwce State Corps Program.

                                                   Page 39                                                             GAO/HRD90-67        Rural Hospitals
                                  Chapter 4
                                  States and Hospitals Undertake   Strategies   to
                                  Assist Rural Hospitals

                                  bank. Thus, patients could spread the cost of the care over a number of
                                  payments, and the hospital was guaranteed payment for the care pro-
                                  vided. As a result of these efforts, the hospital succeeded in increasing
                                  its market share and was currently reporting profits on obstetrical

On-Site Patient Liaison at a      The hospital placed a salaried employee as a patient liaison at the terti-
Tertiary Medical Center           ary medical center 120 miles away. It did so to maintain contact with
                                  patients referred there and ensure that patients returned to the local
                                  health care system for follow-up care. Not only did the program help
                                  maintain continuity between patients and the referring hospital, but it
                                  improved communication between the two institutions.

Hospital-Operated ClinicStaffed   To improve its market share, one hospital established a rural health
by Mid-Level Practitioner         clinic and hired a physician assistant to staff the facility. Community
                                  leaders of the neighboring town had approached the hospital to help
                                  recruit a physician for the community. After more than a year of unsuc-
                                  cessful search, the hospital administrator suggested hiring a mid-level
                                  practitioner. When residents of the area strongly objected to this, the
                                  hospital in conjunction with the state board of family physicians com-
                                  missioned a study to evaluate the town’s needs. When the study deter-
                                  mined that these could be met by a physician assistant, community
                                  leaders accepted the plan. The resulting linkage between the clinic and
                                  the hospital has improved the hospital’s market share.

Hospital-Operated Fitness and     With the goal of increasing its revenue sources, this rural hospital con-
Rehabilitation Center             structed a free-standing, 27,000~square-foot fitness center adjacent to
                                  the hospital. The center includes a lap pool, a half-court gym, an indoor
                                  track, an aerobics arca, and weight machines. There are separate areas
                                  for patient rehabilitation, including physical and occupational therapy.
                                  Among a variety of uses for the facility are health and fitness classes,
                                  wellness programs, and rehabilitation services. Memberships are sold to
                                  individuals (that is, hospital employees and nonemployees) and local

Physician Recruitment,             Successful recruitment of physicians is often reported as a major factor
Retention Important to             related to the success of a rural hospital. Provider recruitment and
                                   retention efforts were the second most frequently reported activity of
Hospital Success                   hospital administrators (see table 4.2). Of these, 27 percent were staff
                                   development efforts that targeted physicians, nurses, or other health
                                   professionals. Successful health care provider recruitment improved the
                                   hospitals’ market share and quality of care, hospitals indicated.

                                   Page 41                                           GAO/HRD9O-67   Rural Hospitals
                                                Chapter 4
                                                States and Hospitals Undertake     Strategies   to
                                                Assist Rural Hospitals

Figure 4.1: Physician   Recruitment    Poster

                                                   FOR A FAMILY PtiCTICE PHYSICIAN
                                                WITH OBSTETRICAL AND SURGICAL SKILLS
                             A reward of $5.000 is offered to aa individual              who ia Brat to identify
                             and mrange an interview   for a fami Yy practice          physician  who mwb the
                             criteria and commits to a three-year   contract.
                             The physician can assume an existing practice on a solo basis or on a salatled
                             basis with Intermountain Health Care. The salaried arrangement includes clinic
                             personnel, rent, utilities. equipment and supplies. computer accounting system,
                             malpractice insurance. etc.. in a new clinic building.
                             This is a great opportunity for an enterprising      physician who wants to live in a
                             moderate-sized. central Utah, value-centered        community.

                                      A SELF-REFERRED      PHYSICIAN     IS ELIGIBLE       FOR THE BOUNIW

                                                 Page 43                                                        GAO/HRD9067   Rural Hospit&
                      --                              _-
                            Chapter 4
                            States and Hospitals Undertake   Strategies   to
                            Assist Rural Hospitals

                            Of the nine state hospital associations we contacted;’ eight sponsor a
                            GPO.The one association that does not sponsor a GPOoffers group
                            purchasing services through a national firm. Through GPO&hospitals
                            can purchase at a lower cost such items as pharmaceuticals, medical-
                            surgical supplies, furniture, and medical and ofFice equipment. In addi-
                            tion to these core items, some GPOsoffer other service options. For exam-
                            ple, through the Illinois GPO,hospitals are given the option of
                            purchasing, at a lower cost, malpractice insurance for emergency room
                            physicians. The program has been so successful that the association
                            plans to expand the option to include other hospital-based physicians.
                            The North Carolina, Mississippi, and Texas hospital associations
                            reported that they offer a maintenance insurance program for their
                            members. This option provides a less expensive alternative to the tradi-
                            tional service or maintenance contracts. The North Carolina association
                            projects that through this option, costs will be from 25 to 30 percent less
                            than individually negotiated contracts.

                            Most hospital association officials we contacted indicated that they
                            believe most rural hospitals are involved in at least one group purchas-
                            ing arrangement. Savings vary from hospital to hospital. Directors of
                            GPOsestimate that hospitals save from 12 to 20 percent through group
                            purchasing arrangements.

                            Through membership in a local alliance, one hospital administrator
                            saved $25,000 on the purchase of a single piece of equipment. Another
                            hospital saved $40,000 on monitoring equipment for the hospital’s inten-
                            sive care unit through a regional group purchasing arrangement.

Linkages and Alliances      To address problems associated with being located in a remote area or
With Other Hospitals Used   being smaller, a number of rural hospitals are attempting a relatively
                            new strategy-joining    local networks or alliances. These structures
to Improve Status           allow hospitals to share knowledge, information, staff, and purchasing
                            arrangements without losing their autonomy.

                            Several terms are used to describe the forms of state or local alliances
                            now emerging--cooperative,     consortium, or affiliation. Their general
                            purpose is similar: to further the common interest of their members.
                            Alliances differ from multihospital systems in that member hospitals

                            “Wecontactedonestatehospitalasociationin eachregionof the UnitedStates.Theassociations
                            werelocatedin Califmma.Montana.Texas.NorthDakota,Mississippi, Illinois,NewYork,North Car-

                             Page 45                                                    GAO/HRD-90-67   Rural Hospitals
                        Chapter 4
                        States and Hospitals Undertake   Strategies   to
                        Assist Rural Hospitals

                        result of its affiliation with the larger hospital, delicensed some of its
                        underutilized acute-care beds and is converting the bed space to utility
                        apartments for the elderly. Also, smaller hospitals in the alliance were
                        supported in their efforts to recruit and retain physicians because of the
                        linkage with the larger hospital. Physicians practicing at the smaller
                        hospitals were less isolated professionally because they had direct
                        access to other physicians and an opportunity to participate in educa-
                        tional conferences hosted by the larger hospital.

                        In Nevada, a rural hospital alliance successfully lobbied for passage of a
                        bill designed to address problems of the state’s rural hospitals. The bill,
                        passed during the 1989 legislative session, requires the state board of
                        health to adopt licensure regulations for rural hospitals that consider
                        their unique operating problems. In addition, the legislature appropri-
                        ated $75,000 for a study by the alliance that would help develop the
                        new regulations. All 10 of Nevada’s rural hospitals belong to the alli-
                        ance, formed in 1988. It has shown that such organizations can influence
                        legislative decisions.

                        Because they offer a less threatening environment than do multihospital
                        systems, alliances appeal more to management and governing bodies of
                        small rural hospitals. Rural hospitals can achieve the benefits of affilia-
                        tion with other hospitals without compromising their independence to
                        pursue their own interest, administrators contend. One difficulty alli-
                        ances face, however, is building and maintaining trust among hospitals
                        that are competing for patients and funding.

                        While many of the state- and hospital-initiated strategies appear promis-
Many Initiatives        ing, little information is centrally available on their merit or impact. For
Promising, but Impact   example, although many states have adopted regulatory reform efforts,
Unclear                 there is little information on the extent to which rural hospitals are
                        taking advantage of these efforts. Also, many hospitals are engaging in
                        similar activities while knowing little of the experience of other commu-
                        nities. Although we did not attempt to determine the financial impact
                        for any of the activities described, rural hospital administrators
                        reported that their facilities were benefiting from the self-initiated

                        Page 47                                            GAO/HRLb90-67   Rural Hospitals
                           Chapter 5
                           Conclusions, Recommendations,    Matter   for
                           Congressional Consideration,  and
                           Agency CulMlents

                           be assigned to the Office of Rural Health Policy, since it is HHS'Scoordi-
                           nating office for rural health initiatives. However, regardless of the
                           assignment of the responsibility in HHS,HCFAshould play a primary role
                           in performing or supporting this function since HCFAadministers 7 of the
                           10 federal efforts that assist rural hospitals.

                           Additionally, there is little coordination between public and private
                           efforts and little information centrally available to measure the impact
                           of the many efforts underway at the hospital or state levels. As a conse-
                           quence, rural hospitals are engaging in similar types of activities with
                           little knowledge of the existence or effectiveness of other efforts. Also,
                           some rural hospitals are unaware of federal support efforts and report
                           difficulty obtaining timely information about specific initiatives. To
                           minimize these problems, a central source of information could be devel-
                           oped and funds allocated to systematically evaluate the more promising

                           Given the complexity of the problems facing rural hospitals, how fed-
                           eral resources are spent is as important as the amount spent. Not all
                           rural hospitals are financially distressed, nor would their closure invari-
                           ably place an undue burden on community residents seeking care. With-
                           out a coordinated approach that targets at-risk essential hospitals, there
                           is less assurance that hospitals most in need will receive federal

                           To realize the full potential of the only federal initiative that targets
Recommendations to         essential rural hospitals in all states, we recommend that the Secretary
the Secretary of HHS       direct the Administrator of HCFAto

                       . develop instructions to guide potential SCHsthrough the application
                       . explore methods for refining current SCHeligibility criteria to better
                         assure that hospitals providing essential services to their community are
                         eligible for SCHdesignation;
                       . monitor financial information on SCHsto identify those in financial dis-
                         tress and assure that they are assisted, as warranted, in applying for
                         special payment provisions, grants, and other HHSprograms aimed at
                         assisting rural hospitals; and
                       . when awarding grants, include an evaluation factor that considers
                         whether the applicant is an scu and if so, whether it is financially

                           Page 49                                           GAO/HRD-90.67   Rural Hospitals
                    Chapter 6
                    Conclusions, Recommendations,    Matter   for
                    Congressional Consideration,  and
                    Agency comments

                    implementation of the SCHprovision and RHCact support this conclusion.
                    We are not suggesting that HCFAgenerally has been inattentive to the
                    individual payment provisions it implements; however, our discussions
                    with HCFA regional and central office staff revealed that they did not
                    have basic information needed to evaluate the implementation of the SCH
                    or the RHCprovision (see pp. 24, 27).

                    Our primary concern with respect to evaluation is that there is no HHS
                    office monitoring the combined impact of the federal provisions for
                    assisting rural hospitals (see p. 48). We found no evidence that such
                    efforts were underway or that any office had responsibility for monitor-
                    ing the overlapping effects of HHSprovisions and programs. Without an
                    assessment of the combined impact of federal initiatives, we do not
                    know whether they work together to protect access to essential services
                    in rural communities, or at least to alleviate the major problems of
                    essential rural hospitals.

                    We recognize that several of the actions HHScites as efforts to address
                    rural hospitals’ problems likely will improve the Medicare profitability
                    of rural hospitals. These actions, while important, fail to assure that
                    financially at-risk SCHSare assisted in taking advantage of the resources
                    available to rural hospitals through HHS(for example, h’asc-state physi-
                    cian recruitment efforts, XII volume adjustment, and the Rural Health
                    Care Transition Grants).

Problems of Rural   HHSbelieves that we oversimplified   the categorization of rural hospitals’
Hospitals           problems into four broad areas. Furthermore, HHSbelieves that the first
                    three problem areas we identified are aspects of the same problem, low
                    inpatient revenue. We agree that the problems of rural hospitals could
                    have been grouped differently; however, we believe the categories we
                    chose present the major problems we identified in a way appropriate for
                    an overview of the problems. Also, we agree with HHSthat the problems
                    are related, and we stated this in our report (see p. 15). A more in-depth
                    discussion of rural hospitals’ problems based on multivariate and other
                    analysis of hospital closures will be presented in a forthcoming report.

                    HHSsaid that we ignored the general problems of a shrinking population
                    and declining economy faced by rural America. We did not identify
                    shrinking population as a problem facing rural hospitals based on our
                    analysis. Our comparison of distressed and successful small rural hospi-
                    tals showed no evidence that hospitals in counties with shrinking popu-
                    lations fared worst than other hospitals. Further, the population of

                    Page 61                                           GAO/HRB90-67   Rural Hospitals
                  Chapter 6
                  Conchaims,   Recommendations,    Matter   for
                  Camgressional Consideration,  and
                  Agency Comments

                  financially secure hospitals should be ineligible for federal grants, only
                  that if a grant is awarded to such a hospital, it should reflect a conscious
                  decision and defined goal.

                  Also, HHSassumes that we are advocating use of “net financial loss” to
                  measure a hospital’s financial need. We used this summary measure
                  because it was available through a national data source and it is a sum-
                  mary measure of a hospital’s total profits and losses. However, we do
                  not mean to imply that “net financial loss” should be the criterion used
                  to evaluate need. We would encourage HHSto examine alternate ways of
                  defining financial need before adopting a final measure.

SCH Designation   HHSbelieved we limited our analysis of SCHsto those with fewer than
                  100 beds, and therefore disagreed with our conclusions regarding this
                  program. On the contrary, our analysis of the SCHprovision included all
                  sizes of SCHS,as shown by figure 3.1. Only our comparison of financially
                  distressed and successful rural hospitals, used in chapter 2, was limited
                  to those with fewer than 100 beds.

                  HHSdisagreed with our position that the SCHeligibility criteria do not
                  adequately identify rural hospitals whose closure could impair Medicare
                  beneficiaries’ access to essential health care services. HHScited three
                  reasons why the proposal in our draft report to refine the current SCII
                  criteria to consider hospitals providing an essential service would create
                  problems: (1) it would be difficult to agree upon what services should be
                  categorized as “essential”; (2) it would require that SCHstatus be con-
                  ferred on any rural hospital that is the sole source of an essential ser-
                  vice; and (3) it would create an incentive for hospitals to create a unique
                  area of specialization, just to qualify for ScHstatus.

                  We agree with HHSthat its current criteria generally identify hospitals
                  that serve as the sole source of care, but believe that some essential hos-
                  pitals cannot now take advantage of the SCHprovision. Modifying the
                  current criteria will have to be done carefully to avoid the problems HHS
                  cites. Given the importance of identifying and assisting essential rural
                  hospitals, however. wt’ continue to believe that such modification is

                  Our draft report recommended that HHSrevise its SCHeligibility criteria
                  to include hospitals that are sole providers of an essential service. Our
                  intent is that the provision of an essential service, such as emergency
                  care, be considered along with, but not exclusive of, other criteria, such

                  Page 53                                            GAO/HRD-9067   Rural Hospitals
Page 66   GAO/HRl%9O87   Rural Hospit.&
Appendix II

Rural Hospitals’ Isolation and Financial Status
(FY 1985437)

                                                       No. of rural                    No. of eligible
                                 No.ofrural        hospitals with Percent with         SCHs with net
                State             hospitals’           net lossesb     net losses             lossesc
                Texas                      172                   91             53                     7
                Arkansas                     65                  34 --     .-   52                     1
                Nevada                       IO                    5            50                     5
                Wyoming                      21                  10             48                     7
                Mlssiss!ppl                  85     ~-.          39             46                     1
                Alabama                      50                  22             44                     0
                Hawall-                       7                    3            43                     1
                Louisiana                    63                  27             43                     3
                Kansas            ~~-      112
                                          -___                   46             41                     2
                South Carolina               38                 15               39                      0
                WashIngton                   46                  18              39                   9
                Alaska                       13                    5             38                   5
                West Vlrglnla          45-                    --,.17.            38                   1
                New York                     53                  20              38                   2
                California                   43               -.-~~-
                                                                 16              37        ~-        10
                Arizona                      20                    7             35                   4
                 idaho                       40                   14             35                   2
                 Utah                        20    ~.         - 7                35                   7
                Tennessee                    63                  22              35                   0
                 Oklahoma                    78                  27              35                   3
                 Maine                       24                    8             33                   3
                 Montana                     52                   17             33 ~~. --~~~~        9
                 Georgia                     83                  26              31                   1
                 Florida                     36                   11             31                   0
                 Colorado                    43                   13             30                   5
                 Mlchlgan                    75                   22       --    29                   2
                 IndIana                     55                   16             29                   0
                  MIssour                    73                   21             29                   1
                 Marvland                     7                    2             29                   2
                Wisconsin                    75                 21                28                     0
                New Mexico                   22                  6                27                     4
                Oregon                       37                 10                27                     5
                llllnols                     83                 22                27                     2
                 Nebraska                    76                 19         --     25                     1
                 Kentucky                    67                 16                24                     3
                 North Dakota                39            --__~ 9                23                     4
                 Minnesota                   106                 22               21                     2
                 Iowa                         07                 18               21                     0

                 Page 57                                                GAO/HRS90-67   Rural Hospitals
Appendix III

Distribution of Transition Grant Awards by
State (1989)

                                                                                        Puerto Rico 1

                  Total 181

                Note. South Dakota had 9 awards at $5,555, 3 at $15,000, and 2 at 50.000.
                Source Based on data provided by HCFA.

                Page 59                                                            GAO/HRLb9987   Rural Hospitals
                 Appendix    IV
                 Opinions   of Rural Hospital   Administrators

North Carolina   “I am concerned about the federal government’s attitude towards small
                 and rural hospitals. A national policy dealing with questions of access in
                 rural communities would go a long way in helping to clarify some of the
                 issues.” (52 beds)

                 “I can gather little understanding for the concept that health care costs
                 may be controlled/reduced by driving smaller, less costly providers out
                 of the market... Given the inequity of our federal reimbursement system,
                 the next decade will see rural America return to the environment of a
                 century ago, no available health care... As a professional manager, all I
                 ask is, place the rural hospital in an equal fair ballgame in terms of pay-
                 ment and let us compete in our market on equal terms.” (78 beds)

Tennessee        “Rural hospitals can survive if they are paid the cost of caring for Medi-
                 care patients. DRGs do not work well for small volume providers, espe-
                 cially in poorer counties. Medicare should pay actual costs to rural
                 hospitals--with    an inflation cap once costs have been set.” (40 beds)

                 “Almost two-thirds of our business is for Medicare patients. We will sur-
                 vive only if Medicarc payments are adequate to cover our reasonable
                 costs. This is not an appeal for special subsidies, but an appeal for a
                 level playing field with respect to the urban/rural gap. It is not true that
                 rural hospitals can deliver the same care for less money than urban hos-
                 pitals. Many of our expenses are in fact higher than urban hospitals. For
                 example, we must pay to recruit physicians whereas urban hospitals do
                 not. We must also pay as much or more for supplies because of lower
                 volume and greater travel distance for shipping. The DRG prospective
                 payment system discriminates against rural hospitals. If this is allowed
                 to continue, many mot‘c rural hospitals will close, including this one.”
                 (39 beds)

Georgia           “Medicare is not paying its fair share of the business overhead costs.
                  Administration of this prospective payment system...adds tremendously
                  to the overall costs. We are shooting at flies with shotguns and can-
                  nons.” (45 beds)

California        “We need a plan for the permanent recovery of the rural health care
                  delivery system.” (34 beds)

                  Page 61                                          GAO/HRLWM7    Rural Hospitals
            Appendix IV
            Opiniona of Rural Hospital   Administrators

Kansas      “The rural/urban inequities must be alleviated... We are not asking for
            handouts. We are doing our best to keep costs down. We are trying but
            we need help. We lost $116,000 last year, and this year may be worse.
            Also, we need to address the growing problem of the uninsured and
            underinsured.” (46 beds)

            “Rural hospitals must receive the same reimbursement as urban hospi-
            tals. The regulations enforced on us by Medicare have turned into a
            time-consuming, costly issue which seems as though there is no
            answer--most      are not relevant to patient care. The nursing staff is bur-
            dened by paperwork instead of doing the job they were trained for. The
            billing department grows weary of inconsistencies in obtaining reim-
            bursement.” (24 beds)

Wisconsin   “Rural health care is an extremely critical issue. Cash payments from
            federal programs cont,inue to go down and down. There is not adequate
            inflationary increases in Medicare and Medicare payment let alone
            enough to generate an operating margin. Equity, adequacy, and fairness
            are all we ask for. The health care system is in a sad state in terms of
            lacking a unified policy. If this country continues to place a high value
            on quality of health c>are,then a concentrated effort to review and eval-
            uate the health system must take place. It must take place fairly and
            consistently.” (132 beds)

            “Financing of rural health care-hospitals,    physicians, nurses wages,
            etc., at the same level as urban hospitals-is the single item most essen-
            tial to survival. Adequate facilities, equipment, technology, training all
            follow dollars. TJrban-rural linkages, mergers, affiliations, shared ser-
            vices have been implemented all over the place and are inadequate as
            solutions with the current short-changed rate of reimbursement.”
            (22 beds)

Minnesota   “Congress must address rural America’s survival and future in a com-
            prehensive well thought out bipartisan plan... Rural America’s economy
            is a fully integrated, fragile network of interdependencies which must be
            addressed as such to be successful.” (136 beds)

            “I believe that Congress is taking the wrong approach in trying to con-
            trol health care costs. First of all, the hospitals that they are hurting by
            their legislation a.rc the small hospitals. These small hospitals are not
            high-cost hospitals, G’s the large hospitals where the high costs are. I

            Page 63                                            GAO/HRD-9087   Rural Hospitals
Appendix    N
Opinions   of Rural Hospital   Administ.ratms

trained personnel, etc.). The bottom line is that Medicare has conve-
niently eliminated these costs from both the inpatient and outpatient
reimbursement formulas.” (86 beds)

Page 66                                          GAO/HRD9087   Rural Hospitals
        Appendix V
        Cmnments From the Department      of Health
        and Human sewices

               ~~iceDmftRmort,                                           Tural


    GAOidentifiedtm       Federal initiatives    that&dress      pmblerrsfacingnlral
    hcepitals either directly or indirectly.         Dzspitethese efforts, anmker
    ofrualhcspit.alsMatpmvidetb2solesmme                    ofcarewithinaccmmmity
    are fi.nmciallydikmss4         andatriskofclcsure.           mny~thersare
    firlamml* lydbtmss&an3haven0tfullybenefitedfrmFederal
    initiatives.     GpDhslievesthatpmblemsren&n,             inpzut,hecauseOf
    shortmaings inpmgrmdesign,            imdequatetargeting,       insufficient
    plblicity,    ard a lack of effective mnitOrimq.
    GmrqxxkthatInanystateg~                    and hcepital admhidmton          are
    aqaged in efforts to address theproblerasofmralh0spitals.               The
    &rat&es     vary amsiaerably.     Mhilemnyoftheeffortsappearprcmising,
    GAObelievesWereislittleinfomation            centrally available0nthei.r
    relative merit or impad. GAOalsobelievesruralh~spitalswouldbenefit
    f?CanvIeFederal g0vermmt facilitatirqanezhaqeof               informtionamng
    States and hcspital Wtors.
    financml difficulties       and we agree with saw2 of the rep~rt's cited
    mascns fortheca-of these               diffiaiities.   Hcwver,wedotiagree
    that%CFAplac&rel.ativelylittle               e@asiscmeMluatirgx&etherthe
    Federal prcyrys crprovisicns          (desigredto ass.istruralh0spitals)          are
                      mtmdedpnpose."          WemonitOrthestatusofallh~spitals
    tlrzYhz&&              'vepaymatsystmmanon-goingkasisa-d,                   overthe
    past several years, havegivenparticularattenticmt~thedeteriorati~n
    intbefiscalcon3iti0nofmnyruralhcepitals.                   Theacti~nswehave
    takmtoaddress        theprcblemofruralhc6pitals           includethe     following:
         0 wehave rfmxmm3edhigherupdatefactorst0ruralh0spitalsfor

          Page 67                                                        GAO/HRD9047        Rural Hospitals
     and&man services

Inadditicm,itisaFparent            thatc9Dviewsthe       Pw==of-FACH/RFCH
rm                 access h&taW1.         Webelievethattkepmqremisinterrded
                                                .    .
Tllt?EAcHpuiprogrannisintended               D&al&an accesetoccst-effecti.ve
pralityhea&hcareservicesinS                   -.Itprm4cksamsansfor
smallrurelk6pitalstomminfinanciallyviablebyamertig                          to "Nlal
referral,    al-d -&        agreementswithEsserhialpEcgs~ty
ofinpatiatacutecare-ices.                  Wekelievethatthemetmcbxkyof
the syetem ti the devellqrent Of sWh IEtamrks will ensu?x thatthefuJ.1
range ofheelthcam         -ices       is availableto   rurelMedicare

1OOheds andthus didnot -iderthe                finer&al    status of the 62
fimncielly     successfulhcspitalsareelimimtedfmnthesh&y.
Weelsodisqreewiththeintmductorystatementref                  erencingscfisas
'1. . . theonlyFederel      prqramwfii&tergetsessentialnualhc5pitalsin
all states."     The SCHedjustmmt isnoteFederalpECJlXW                it is sinply a
meaicare payment adjttstmmt taqe+xdatcertainhcspitalswhichsemees
the sole sarce of care masmablyavailableto              Fart Abeneficiaries.
~-~targetedpaymentadj=+==t=,                          such as ths one for mxal
referrelcYenteE,     thattherepotididmtaddress            indepth.

      Page69                                                       GAO/HRDSO87 Rural Hapit&
      Appendix V
      Comments From the Department     of Health
      and Human Services

F-age 5

Finally, althcugb we recqnizethattheSaicriteriamightbeiqr.uv&
 (.3x! we solicited cmnentontistieintheMay8.1989~
Rekster),webelievecuraJrrent            qmlifyingcriteriabaeedondistam2
scmrce Of inpatient-          ?zmsombly available to Part A beneficiaries.
Thecriteriancwineffezt          mxqnizethatmtallmralhospitalspmvide
afullmngeofswicee.              That is, within certain mileage limitations,     we
will classify an urder 50-b& bcspital as an SCH if it can darmstrete
thatitwculdhavemtthematket              share test aceptthatsmepatients
were forcedto seek-           mtsideits     service areebecause it didmt
furnishthe      specialized -     thatthepatients        required.
classification      sbculd be based on a hospital's provision of an %eeential"
service.     The report. identifies    one instance inwhichao        investigators
care. ~1awspecificallydefinesanSCHasahospitalthat
'1. . . is the sole ecurceofinpatienthcspital-ioesreasoMbly
available to in3ivichLals in a geographical areawhoare entitledto
benefits . m-der Part A." 'Ihelawdoes not define a Schwas ahospital
fumshuqafullrangeofservices.                  IntheexanplecitdbyGAO,            we
believe fewPartAbeneficiariee-disadvantagedbecause                     of their
imbilitytoobtain&etetricalservicesoearby.                   Therec~tlymleased
Prcspxtive      Paymnt Assessaent camnission (ProPAC) report titled,           m
9 ationshi       E?&weenDecl'                            itals and Access to
Inmtient      Services forMedi-        Beneficiaries   inmral    Areas, concludes
beneficiaries     who reside in rural areas in the five states (&x&d)."
wmldmtetbatifanyth+,the               carrc?&SoIcriteria        are to0 broad. In
yet another PmPAC study it was found that the majority of current SC% do
not serve themajority     of Kedi-patients         intheir    service area. ?hat
is, mstMmli-patients           s-%&hospital-ices           atamxedistmt
facility.   ~isnottosaythataccesswouldnotbe~iralifthe
SCHswere to close, but it shouldbe mtedthatthe               role SC% play in
deliveriq   inpatient-appearstobedeclining.

 --                                  --..-.-___

      Page 71                                                    GAO/HRD-9087    Rural Hospitals
      Comments kom the Department                  of Health
      and Human Services

                  inanaal        posltum   of a hcxpim.                 wsbelievetitdsfiningti
 cparatidizing              the manhg       of the term           “firaxial          distrez”         is   an
 extmnslydifficultanlpotentially                         futile       task.

       (1)     ~teFs&=~n.m.lhcmital~;

       (2)     s
               Hives:              anj


       0       hFY1989,ORHPawxdadammtract                        to the              Natimal         Govwmx's
               assist    rural    hospitals      and r2umanitis;

       0       omPsb3ffhaveparticipated.insareralseninars                                         spcor;oredby*e
               Daparbnwt     that l3ri.q       tcqsthsr      Stats    le@l.atxxs                  to wcharqe
               infolzxrEkion    cm state      ?i-ural hsalti     pl-qlas:

       0       each year,      theCEW       staffmkes10to                    20presmtaticnr;toState
               hcspital     asscciatiowamIthsirnralhospitalamtibsmy

           Page 73                                                                               GAO/HlUMM37       Rural Hospitals
                       Comments From the Department    of Health
                       and Human servicw

Now on p. 34.      Wsbavemkxsildgeofthxutre                   refe?xncedmpage52,semnd
                   psnqzqh,     tit   WcmdngtosncwIpofficial,              theoffice  lacksthe
                   resaucesand~stsfftocanyoutitslesparsibilities.W                      SsvealORHP
                   officials   had dlsQLspiF     with G&Oofficials      regadbq this mport.     For
                   informticnclearhqbxsewas           at a ~because0fthel.a&0fan
Now on p. 35.      ThsmmlLlsicmcnpage53thattheval~0ftbeowHp'?lasmtbeen
                   realized~*cmtbbasisofa         Wmit&revi&'      is difficultto       rerxncile
                   witbtbs~            in CEBJPsince 1987. lhs ca3.P currently:
                              0   cmrdinatesalllural        -wititheDepartmerrt;
                              0   staffstheNatimalpdvimryc&mlitteecn~Heslthwhich
                                  issued a anprehensive set of -tionstotbs
                                       . .

                                   a)   agxantprcqramtonxalhealthresearchoenters,
                                   b)   a demJlstratian satellite     telecammmicaticms     system in
                                        WsstTews; ad
                                   Cl   baskma     mmunicaticol~linkirq-States                a&the
                                        rural mmtitusmy    inacooxdinatedeffortto            solve
                                        rual bealtb problens.

                   HcFAbaslzetab&           irdqa%t      researh firrntoperfomanevaluationof
                   theFUalHealthlEsitionGrants              Fzcgram. mis waluati.m includes
                   cqoi.qllKali~~Ofthe           program ard a stdy of the effectiveness of the
                   g-mot-in            adW2ssiq the bcspital, camunity,andbealtllcareneeds
                   identifiedbythegrsnhss.           suchevaluationsare     cmmm for IiCin prcgrans
                   InthediscussionoftheMedicz3lAssistame             Facility    (M) deammbation
Now on pp. 28,30   in~(pageS44to46),~statgthatHcFaneedstoresolve
                   KI?Ahasdecidedtouseacc6t+as&re"                        ntsystemfortbsMAFs.
                   misisbassdonths         EAcH/RpcHlegislationthatcalls          for sxh a system
                   forRPcHsintheearlyyHrsofthatpICqxam.                  m collabrationwiththe
                   Mmtma Hospital Association, xcm has mads sukbntialp~inrecent
                   lsdhsinresolv~mtonlypaymerrtissues,                lmtmttmsrelatedtm
                   quality assurance, utilization      review, and certification     and life safety

                        page75                                                      GAO/HRD9O67RuralHospit&
Appendix VI

Major Contributors to This Report

                  Mark V. Nadel, Associate Director for National Public Health Issues,
Human Resources      (202) 275-6195
Division,         Edwin P. Stropko, Assistant Director
Washin&on, D.C.   Marsha D. Lillie-Blanton, Assignment Manager
                  Elizabeth A. Wennar, Evaluator-in-Charge
                  Suzanne M. Felt, Evaluator
                  Michael J. O’Dell, Technical Advisor
                  C. Robert DeRoy, Evaluator (Computer Science)
                  Andrew Sherrill, Graduate Fellow
                  Lester Baskin, IJniversity Intern

(108732)          Page 77
Appendix V
Comments From the Department   of Health
and Human Services

Page 76                                    GAO/lJRD!W67   Rural Hc~&t&
                   Appendix V
                   CommentsFrom the DepartmentofHealth

               and has teen Acwn to be effective.
Now on p. 35   wearealso-                  abxtthestatelnentonpage29thatthereare
               -          atx&thecapacityofCXUiPto-cuttheooordinationand
               cversight&ties.         Inthisregard,wepotitoma~~~~initiativesfor
               cccrdinaticnthatare~1~edandrespected.                             Porexanple, twice
               health-inthe                  Departmentto~rkwithruralhaalthresearcf
               centersardaordinate           research efforts.    Ncm-gwernwnt repres&zatives
               invclvedinnlralhealthreswEh               anddez0x&aticmproject.s,        suchas the
               'Ihe ORHPhas heen extensively involved in the design ard evaluation of the
               de=lopingPV         toi.npmveacoesstoruralhealth-ices.             Inthat
               nnnitcrpnnis~stateprqraw                       ensun.qthatruralresidents
               have a-       toessential-ices.       nle~'sf-,hlxever,has
               lmttxzsnon a&3ressirrJthenea3sofall~hcspitals,tichin
               -instancesdonotprovideessentiala-,                   tmtonthehcspitalsard
Now on p. 34   Ihemnwrtcnpage52,seccoldparagraFh,thatcharacterizesthe~as
               beingmnstrained        init.3 qerationstzecauseof   thelackof adirect
               apprcpriation    is not accurate. lb2 irnwzxd      FY1990 appmpriationhas
               !meoRHPisnai       -tially       selfsupporting.

                    page74                                                       GAO/'HRB90-67Rural Hospitala
    itselfwitht.lxdi.stribtimofbalthr.                              -tocaremaybe
    gz-eatlyaff~bythelackofan                   dzstetrical    service, emqency
    witMn#e&50inoftheMadicamprcgmm.                         H!sp7qpyareascloaeas
    whereitdcesmtalreedyexist.                 CWgSSSWillhavetieMdneW
    legi.slaticmiftheFEdamlGcnmmmt                 istokechargedwiththa
    distr!Jxltionofhealth           reaaxcsmanaticmalbasis.

    Several points mst be noted in discussirq the issue of prioritiziq              grant
    pref-           inthelegislation.        Ininpl~ths~HcFAwas
    citedinthelegislaticmmiccrmaitteereportas-                          forthepY.zgmL
    HcFAinplementedthe          prcgmminmkrtohelpmralhcspiixlswithanyof
    thecitedpxblenm             Tims,~balieveduvltwawereii@emantirq

    Finally,HCZ'Aisnctawamofawide-rarqingccxmsus                  of Mca~rs      of
    CQlQUnityWttl-needsiurldoestihavethe                     resaurestopezf~an
    FY 1989, mre than 1.800 rural bspitals        were eligible    for grant awards
    and-        700 sutmittedapplicdticns   fortheprcgmm.        Emnifeuzhneeds
    cculdbeagmedupcsl,alargekcdyofdatatn                ueasurethese~isnot
    available. TWagrant awards-made,            therefore, cmthebest infonmticn

          Page72                                                        GAO/HBD9O87 Bud     Hospitals

    we have pIxpar& an iswc%KzforthemiderReinsxasanent~that
    givesdetailedinstm&ionscmallprovisians~                              SCHS. Tl-lelIBIlUl

                                       . . . .              iatoincl    eh
         (21 Q                                                                 itals     that
             are sole-         iders of an essential      service fe.s. enem-.
             cketetrics~:      and

    criteriadonotadeq&xlyidentifyruralhcspitalswherecl-                                aaild
    jmpairMedica.rekeneficiaries~         accesstoessential.balticareswices.
    CXJ is critical     of the am3mt gualifyirg         criteria     because Wiay depend on
    clistmmardmarketsharetoi~fy~.                            InatMitiontnthedifficulty
    %ssmtial"      b-3 d&agree with this Ation                    for the follcwing
    ofit.spmxjmi~tootherhoqitals.                  mati.s,ulfiartheprqasal,three
    ifeachofferedangsential-icethatthe~two~dnot.                                     Wedo
    samz of Caremasonably available inits                cxmmmityregardless        of any
    unigueservicesitprwides.              Nodmbt,ifoneofthethreehcspitalsi.n
    cxxmnmiq forthe service.


         Page70                                                           GAO/HRB9067RuralHospit&
                        Appendix V

                       o On Mar& 10, 1986, we issued proposed regulaticols to allow an
                         adjW          to thehcspital     specific portion of the paynwIt for sots
                         -icesaddedto~t               mmmmitymedicalneeds.        lhispmvisionwas
                         WY               enactedintolawaspartofthe0msolidatadCxrmibx
                         aUaget Rexmciliaticn        Act of 1985 (P.L. 99-272).
                       0 KfctiveOztcker         1, 1989, we 1txm-d the mileage criterion        for SCH
                         gualification     and we liberalized   the xqualification      standard for
                         thcf;ehospitalsthathrzdprwiouslygivenupscHstatus.                   In
                         addition, we streamlinedtheexcepticslpmcesS              for volume declines.
                       o In the May 8, 1989 Federal P.&m             we solicited public ccmwnt on
                         ammbarofissws         related to assuring %ssenti.al a-"          to

                   Amcpp.- F-         -            achninistereabytheHealthQreFinancing
                   i?damdmtion      (HCFA), the report ccmcmbatesattentionontheScH
                   yL-ov&nlgi~                       ~~Iqalify*critrxi.a                inadequately
                                                                onuunlt1es.     that the payment
                   policiesbavebaen     ineffective    inprot&cirqtbesehcspitals             frcm large
                   financiallosses,    curl that insufficient       adk&trative      attention has been
                   given to the SC-! provision.
Now on p. 15.      hcepitalsintofourareas             (P. 4). HCFAbelieves that this categorization
                   isnuchtco        ~ards~listic~i~~thegeneralpmbl~ofa
                   shrinkirqpo@ationanddecliniqeccnany                    fac&byruralAmericaasa
                   tile.      Ihefirsithreeissues           identifiadbyGA0     are, in fact, aspects of
                   the sameprcblem, lcw inpatient rsvenue, attritutable               to nultiple cd-.
                   specialists)andhi~fixedcmtsperQse(duetolowVOl~).                               Table3.1
Now on p. 21.      cnpage 30, therefore, dces rnt acoxatslyportmytbe                   potential iqxct of
                   the identified       Federal initiatives.
Now on pp. 25-26   Hcspital/IbuaPrprimary8reHcspitzl(EAcH/RpcH                    program (pp. 37-38)) d
                   listswncernsaboutfactorsthat~~yltititsimpact.                             Astherqort
                   notes, fur& have notyetbeen            ~rcpriated         forthisprqran            HCF+Ais
                   inplementedwhen approlniations          are available.         lbs legislation      authorized
                   criteria    for selsctirgtbese      states.       IndevelqCrqthscritsriausedto
                   considenticmwillbe         given to those organizations thatdenwstrata                  need.
                   Webelieve that it is appmpriatet.0               startthsprqram         inalinitedrnmbar
                   of Statessothatp~experienoecanbegainedbefore                                it&expanded
                   to other sites.      Althcughthis      willlimitthe          impact of the pngram in the
                   short tern,, wsbelievethatthelonger                 rargswx~ilityofthe              prcgram
                   will be enhanced.

                          Page 68                                                           GAO/HRD-90-67Rural Hospitals
Appendix V

Comments From the Department of Health and
Human Services

                DEPARTMENTOF     HEALTH   8.4 HUMAN      SERVICES                    omce Of InSpector General

                                                               APR 6 1990

             Mr. Mark Nadel
             Associate     Director
             National    and Public     Health        Issues
             United States General
                Accounting     Office
             Washington,      D.C.    20548
             Dear Mr. Nadel:
             Enclosed are the Department's     comments on your draft         report,
             "Rural Hospitals:     Federal Leadership     and Targeted      Programs
             Needed."   The comments represent     the tentative     position     of the
             Department  and are subject    to reevaluation      when the final       version
             of this report    is received.
             The Department    appreciates the opportunity                 to comment on this
             draft report   before its publication.
                                                          Sincerely    yours,
                                                              -> 1,'
                                                          Richard P. Kusserow
                                                          Inspector General

                  Page66                                                        GA0/HHB9067RuralHospitals
           Appendix IV
           Opinions of Rural Hospital   Administrators

           would agree that there is a lot of fat in the system but at this point in
           time it’s not in the small rural hospitals. The current reimbursement sys-
           tem is making the fat get fatter and eliminating access to health care.”
           (47 beds)

Texas      “I’m not sure at this time that ALL hospitals should survive
           Maybe, like the animal kingdom or even the “free market,“ this is the
           time for the survival of the fittest. I think we can survive and serve the
           community for at least the next 5 years, barring any unforseen major
           setbacks. Setbacks that could affect us negatively... continued cutbacks
           in Medicare/Medicaid programs. Two years ago, we made a few thou-
           sand dollars on Medicare. In 1988, we lost $28,000, so far this year
           we’ve lost $57,000 to Medicare. Since we are a hospital district, we are
           totally responsible for footing the bills for the indigent care. In 1988,
           that amounted to $35.000. It continues to grow.” (16 beds)

New York   “Rural/urban reimbursement variance must be eliminated... recognition
           of the higher cost in rural areas due to lower volume and standby capa-
           bilities.” (53 beds)

Colorado   “We are a sole provider. Since the start of PPS,this has been a disadvan-
           tage rather than an advantage. Our hospital-specific component and the
           National/Regional component are both below the national figure. If we
           could receive the 100 percent national rate instead of our current
           blended rate, our Medicare reimbursement would immediately increase
           17 percent. To do this, we would have to give up our sole-provider sta-
           tus. If we did this, the gain would be offset by the fact that our capital
           pass-through would then be subject to reduction and we would no longer
           be eligible for PIP [periodic interim payments]. In addition to being
           penalized instead of helped on our blended rate, we are at a significant
           disadvantage with the way the wage index is handled. In the days of
           cost-based reimbursement, Medicare forced hospitals to allocate all costs
           for ancillary services evenly between inpatient and outpatient services.
           This shifted costs from the inpatient to the outpatient side. Our current
           DRG rates are based on these reduced inpatient costs. We are now being
           reimbursed for outpatient services based on averages from physicians’
           offices and freestanding providers that do not include these costs (24-
           hour coverage, low-volume/high-cost procedures, strict building codes,

           Page 64                                           GAO/HRD9O-67   Rural Hospitals
           Appendix IV
           Opiions  of Rural Hospital   Administrator%

Arizona    “Congress should recognize that there is a difference between small
           rural hospitals and large urban hospitals. Several months ago, I com-
           pleted a grant for the Rural Healthcare Transition Grant Program...it
           took two weeks of my own time, plus additional time for others. It
           should be noted that a 99-bed hospital has capabilities well beyond that
           of a 22bed rural and, in terms of grant writing, the rural hospital most
           likely to receive a grant is the one which needs it the least, i.e., the
           larger facility. The smallest hospitals should be given special considera-
           tion. Medicare intermediaries are in perfect position to represent both
           the interests of Medicare and rural hospitals but in fact represent Medi-
           care’s interests only. Most rural hospitals do not have the staff who can
           become Medicare experts, but the intermediary does. Some 20 months
           ago, we filed for a specific payment (due if a decrease of greater than 5
           percent of our Medicare discharges). Our intermediary placed the bur-
           den of proof on us, and to date we have spent almost $2,000 just to fill
           out the paperwork. It seems very strange that a law enacted by Con-
           gress to provide semi-immediate relief to hospitals who have suffered
           utilization declines could be effectively ignored or side-stepped by both
           my intermediary and HCFA for over one-and-a-half years. (22 beds)

Nevada     “The business office must constantly train to be current in new regula-
           tions, laboratory and X-ray fee schedules, data collection for Medicare/
           Medicaid cost reports, new collection laws, indigent care claims submis-
           sions, Hill-Burton charity care regulations, prospective payment reim-
           bursement... Every person on this sta,ff entered health care to be of
           service and has become a procurer for the federal government, to obtain
           resources for the continuation of health care. The twin burdens of over-
           regulation and under-reimbursement will shortly force closure.”
           (20 beds)

Nebraska   “If HCFA would require less paperwork, we would need less office staff.
           If JCAHO [Joint Commission on Accreditation of Healthcare Organiza-
           tions] was eliminated or became more realistic with requirements, less
           staff would need to be employed... If regulatory agencies would become
           more realistic with requirements, costs would be lower. We are also find-
           ing that hospitals are hiring more staff in nonpatient-care-related
           departments and less in patient-care-related departments. We need to go
           back to the basics of taking care of patients and eliminate the redundant
           documentation requirement!” (49 beds)

           Page 62                                          GAO/HRB9641   Rural Hospitals
Appendix IV

Opinions of Rural Hospital A dministrators

                         The opinions of individual hospital administrators presented in part or
                         whole in this appendix are for information only. They should not be
                         interpreted as a consensus of all who responded to our survey or with
                         whom we met. The number of beds at the facility of the responding
                         administrator is indicated at the end of each statement.

Perceptions of Federal
Programs and/or
Mississippi              “Government must realize the costs for rural hospitals to provide health
                         care to their communities are equal to, if not greater than, the costs
                         incurred by urban hospitals.” (72 beds)

                         “The largest problem that affects small rural hospitals is the criteria
                         used to determine the necessity for admission and length of stay.
                         Because the public does not understand these regulations, the hospital
                         and doctors are always the bad guy when they try to explain these regu-
                         lations to their local communities... There are too many regulations that
                         are in place, requiring too much paper work.” (59 beds)

                         “I find a mutual sentiment among my colleagues in three areas: (1)
                         unfairness associated with the differential between urban and rural
                         facilities, (2) inadequate DRG [diagnosis related group] rates to cover
                         actual cost for services rendered, and (3) inadequate capital pass-
                         through reimbursement. Other mutual concerns are: the admission crite-
                         ria for Medicare recipients does not consider social circumstances, com-
                         petition for physicians and nursing staff; and the increasing cost of
                         supplies necessary to administer the quality of care which we are all
                         dedicated to. Larger facilities can better utilize staff and allocate real
                         cost over a broader range of services. The rural facility is required to
                         maintain the same staffing patterns on a certified bed basis as the urban
                         facility, and salaries are comparable. DRG #089 and #127 carry a reim-
                         bursement to urban facilities of $5,300 and $4,500, respectively, while
                         reimbursement to a rural hospital is $2,200 and $1,900. I seriously
                         doubt that salaries and supplies are 139 percent higher in the urban
                         facility.” (57 beds)

                         Page 60
Appendix II
Rural Hospitals’ Isohtion   and Pinmcinl
status (FY 199bs7)

                                                    No. of rural                        No. of eligible
                                No. of rural     hospitals with Percent with            SCHs with net
State                            hospitals8         net lossesb   net losses                   lossesc
Virginia                                   42                   8          19                           1
North Carolina                             38                   7          18                           0
Ohio                                       65                 11           17                           0
Massachusetts                               6                   1          17                           1
Pennsylvania                              42                     7                17                   0
South Dakota                              49                     7                14                   3
Vermont                      ~. -          14                    1                 7                   0
Connecticut                                 2                    0                 0                   0
Delaware                                    4                    0                 0                   0
New Hampshire                              15                    0                 0                   0
Total                                  2,361                   766                32                 119
aNumber of rural hospitals with good Medicare cost report data for at least 2 years between fiscal year
1985 and 1987.
bHospW4s’ net total margln for the 3.year period fiscal year 1985-87 Hospitals with 2 years of profits
and only 1 year of losses were excluded from the number with average losses
“‘Ellglble SCHs” refers to hospitals that (1) have been designated as SCHs at some point in time,
(2) meet conservative distance or market share cnteria, or (3) have been judged by the court to be
ellglble for SCH status but are not yet designated

Page 58                                                               GAO/HRB9O-67       Rural Hospitals
Distribution of Rural Health Clinics by
State (1989)

                 Note. (+) lndlcates a hospital-operated rural health cllnlc (total 14)
                 Source. Based on data provided by HCFA

                 Page66                                                                   GAO/HRD9047   Rural   Hospitals
                         Conclusions,Recommendations, Matter for

                         as distance and patient travel time. HHSapparently interpreted our sug-
                         gestion to mean that such hospitals should receive SCHdesignation
                         regardless of these other criteria. Given HHS’Sconcerns regarding the dif-
                         ficulties of implementing such criteria, we have revised our original rec-
                         ommendation. (See p. 49.)

                         HHSalso stated that it believes existing criteria are too broad. To support
                         its view, it cited a Prospective Payment Assessment Commission (ProPAC)
                         study. HHSmaintains the study found that the majority of current SCHS
                         do not serve the majority of Medicare patients in their service area. We
                         could not identify any recent ProPACstudy that contained such a finding.
                         HHSmay have been referring to a recent ProPAC-commissionedstudy
                         which made other findings related to the market share of isolated hospi-
                         tals. The study acknowledges that its estimation procedures “underesti-
                         mate, perhaps substantially, the number of small hospitals eligible
                         under the predominant market share criteria.‘12 Because of this limita-
                         tion, this report should not be used to gauge whether current SCHcriteria
                         are too broad. However, our suggestion regarding essential services does
                         not preclude HCFAfrom making other changes to improve the SCH

Office of Rural Health   HHSexpressed concern that our report did not recognize ORHP’Srole in
Policy                   coordinating federal rural health policies and research. Because of HHS’S
                         concern, we expanded our discussion of ORHPto more fully reflect its

                         We continue to maintain that ORHP’Sfull potential has not been realized.
                         As the office with broad responsibility for rural health issues, it is in a
                         unique position to influence federal policy if given the funding to inves-
                         tigate the operations and impact of federal initiatives, and directed to do
                         so. While new funding for ORHPhas been allocated since the time of our
                         review, it is too early to assess the impact it will have. To the extent
                         that the new funds are sufficient for ORHPto establish a national
                         clearinghouse and to become more substantively involved in evaluating
                         federal rural health initiatives, its capacity to perform oversight and
                         advisory roles will be enhanced and our recommendations will have
                         been implemented.

                                              SmallIsolatedRuralHospitals:AlternativeCriteriafor Identificationin
                                  WithCurrentSoleCommunityHospitals,FinalReportto ProPAC,  1988,page56.

                         Page64                                                     GAO/HRD96-67
                           Chapter 6
                           Conclusions, Recommendations,    Matter   for
                           Congressional Consideration,  and
                           Agency comments

                           rural America is not shrinking, although it is growing at a slower rate
                           than urban America.’ We do discuss the impact of a poor economy on
                           distressed rural hospitals (see p. 18). We think this context for discuss-
                           ing the economy is appropriate, since comparing the overall rural econ-
                           omy with the overall urban economy does not explain why some rural
                           hospitals thrive while others are financially distressed.

Prioritizing Funding and   HHSstates that we assume that rural health problems will be solved sim-
                           ply by channeling grant funds to rural hospitals. This is not our position.
Defining Financial Need    We discuss the use of grant funds because the Congress authorized their
                           use under the Rural Health Care Transition Grant Program.

                           HHSbelieves that we are proposing to use a measure of financial need as
                           the sole criterion for targeting grants to rural hospitals. We do not
                           intend to suggest such a position. Our report recommends that hospitals
                           that are both financially distressed and essential be given greater con-
                           sideration for funding [see pp. 49-50). We believe this criterion is appro-
                           priate whether the goal is (1) to assist the transition of the hospital to
                           provide an alternate mix of services or (2) to assist the hospital in
                           remaining a full-service acute-care institution.

                           Further, HHS’Sposition on defining financially needy hospitals is unclear.
                           IIHS states that under the Essential Access Community Hospital/Rural
                           Primary Care Hospital Program, “special consideration will be given to
                           those organizations that demonstrate need.” It is unclear from this state-
                           ment whether, to receive special consideration, hospitals are supposed
                           to demonstrate program
                                             __-      need (for example, need for a new mix of ser-
                           vices), financial need, or both. If HHS’Sstatement refers in part to finan-
                           cial need, the agency will have to develop an objective, operational
                           measure to assess need. Yet, in another section of its comments, HHS
                           objects to “defining and operationalizing the meaning of the term finan-
                           cial distress” because it “is an extremely difficult and potentially futile

                            We believe that while any working definition of financial distress will be
                            imperfect and incomplete in some way, the consequences of its imperfec-
                            tions will be less important than the consequences of refusing to adopt
                            an objective measure of financial status. We are not suggesting that

                            ‘Datafromthe 1989StatisticalAbstractshowthat between1980and1987theU.S.populationof
                            rural areasmcreased4.1percent,wmparedwith an8.4percentincreasein the populationin urban
                            areas.Databy stateshowrural areapopulationdeclinesin only ninemidwestemstates(MN,lA, NE,
                            ND,SD,KS,IL, IN, andOH)andonesouthernstate(WV).

                            Page52                                                    GAO/HRD-9067   Rural Hospitals
                              Chapter 5
                              Gmclusions, Recommendations,    Matter   for
                              Gmgmssional   Consideration, and
                              Agency conunents

                              To improve the coordination of federal, state, and hospital efforts and
                              ensure that some entity with a broad perspective of the problems of
                              rural hospitals can perform a substantive oversight and advisory role,
                              we recommend that the Secretary assure that ORHPis given the
                              resources to

                            . serve as a focal point of information on state and local initiatives and
                            . evaluate the individual and combined impact of federal efforts to assist
                              rural hospitals.

                              If congressional intent is to preserve rural residents’ access to hospital
Matter for                    care, the Congress should require that essential hospitals that are finan-
Congressional                 cially at risk be given priority when applying for federal grants
                              designed to assist rural hospitals.

                              HHS'Scomments on a draft of this report focused primarily    on five areas:
Agency Comments and           monitoring and evaluation efforts, the problems of rural hospitals, pri-
Our Evaluation                oritizing funding efforts, the SCHdesignation, and the Office of Rural
                              Health Policy (see app. V). Each of these areas is discussed below. Many
                              of the technical comments suggested by HHSwere incorporated into the
                              text of the report.

Monitoring and Evaluating     HHSexpressed concern that our draft report characterized the SCHprovi-
HHS Programs and              sion as a “program.” HHScommented that “the SCHadjustment is not a
                              Federal program; it is simply a Medicare payment adjustment targeted
Provisions                    at certain hospitals which serve as the sole source of care...” We agree
                              that the SCHprovision is not a program, but believe it should be adminis-
                              tered and monitored more like one. For example, in a program targeted
                              at a group of hospitals, more concern likely would be placed on assuring
                              that the target group is aware of the program, has a clear idea of how
                              their applications will be judged, and faces a reasonable cost of applying
                              (see pp. 24-25). Further, there would likely be a requirement for periodic
                              regional reporting on application decisions, or some form of required
                              record keeping, so that policymakers in the central office could better
                              monitor the program and make adjustments as necessary (see p. 25).

                              HHSdisagrees with our conclusion that “HCFA places relatively little
                              emphasis on evaluating whether the federal programs or the provisions
                              are meeting their intended purpose.” Information we obtained on the

                               Page 50                                          GAO/HRD3047   Rural Hospitals
Conclusions,Recommendations,Matter for
CongressionalConsideration, and
Agency Comments
              Many rural hospitals find it increasingly difficult to keep pace with
Conclusions   rapid changes in the health care industry and to address the multiple,
              interrelated problems affecting their financial viability. Federal, state,
              and hospital initiatives have been developed in response to many of
              these problems. In some cases, the efforts are modest; in others, substan-
              tial. For many of the efforts, however, it is either too soon or there is too
              little information to evaluate their impact.

              A significant number of sole community hospitals are at risk of financial
              failure. Among rural hospitals, SCASare of greatest concern because
              their closure may result in communities losing reasonable access to
              acute-care services. Improved reimbursement made possible by OBRA89
              should reduce future Medicare losses of S~HS.However, the overall low
              profitability of SCHSwith fewer than 50 beds suggests that even with
              recent legislative changes, a number of essential rural hospitals will
              remain financially distressed and at significant risk of closure.

              For SCHS,special efforts are needed to help assure communities’ contin-
              ued access to essential services. HCFA,however, does not systematically
              bring to bear the assistance available to rural hospitals under several
              other Medicare and HHSprograms. For example, SCHSwere not given
              assistance in obtaining transition grant funds, a potential source of
              financial assistance. Such assistance would be beneficial since at least
               119 rural hospitals are financially at risk and appear to provide the sole
              source of care reasonably available to Medicare beneficiaries. Further,
              the eligibility criteria used by HCFAto designate SCHSdoes not consider
              all hospitals whose closure would create a problem of access to essential
              services. HCFA'Sgreater attention to SCASwould better assure that they
              obtain the assistance currently available though a variety of federal

              Programs that can help SCHSavoid or recover from financial distress
              have administrative problems that mirror those that exist for rural hos-
              pitals in general. That is, there are several programs and provisions that
              could assist these hospitals, but they are not well linked or monitored to
              assess their combined impact, and there are few efforts to target fund-
              ing so as to ensure assistance to hospitals most in need and essential to
              their communities. Improving the operations and monitoring of federal
              efforts to assist rural hospitals may require restructuring some of the
              initiatives. It may also require HIS to establish a more formalized system
              for monitoring and evaluating activities that have the potential to assist
              financially distressed. c,ssential rural hospitals. This responsibility could

               Page 48                                           GAO/HRBSQ67   RuralHospitals
                                           Chapter 4
                                           States and Hospitals Undertake    Strategies   to
                                           Assist Rural Hospitals

                                           generally have more independence and flexibility to meet their individ-
                                           ual needs. The structures of alliances vary, from informal to formal

                                           Memberships in the local networks we surveyed ranged from 4 to 28
                                           hospitals. Forty-three percent of the hospitals had been members of
                                           their alliance for less than 5 years. All the alliances had formal struc-
                                           tures that included a full-time salaried director.

                                           Benefits of an alliance vary, depending on the organization’s capabilities
                                           (see table 4.3). However, more than 65 percent of the hospital adminis-
                                           trators reported moderate to great benefit from alliance activities in the
                                           areas of lobbying and drafting of legislation, management workshops,
                                           training in quality assurance methods, and rural health conferences.

Table 4.3: Benefits Reported    by Rural
Hospitals From Membership      in an                                                             Degree of benefit obtained (percent of
Alliance                                                                                                  hospitals reporting)
                                           Service accessed
                                                   ___--     through alliance
                                                                      ~. --~-~~~               Great
                                                                                                ~-~~~~._~       Moderate             None
                                           Board development                                        15                  46              15
                                           Dretary servrces                                          4                  21              52
                                           Frnancing arrangements                                ~. 25                  23              29
                                           Grant funds                                              33                  23              25
                                           Laboratory servrces                                       6                  21
                                                                                                                       -___             50
                                           -._-     services
                                                    ----       -                                     4                   8              64
                                           Lobbying/draftrng legislatron                            39                  27              14
                                           Management workshops                                     29                  46               6
                                           Physicran recrurtment                                    12                  31              40
                                           Qualrty assurance                                        25                  46
                                                                                                                         __-             8
                                           Rural health conferences                                 35                  31      ----    14
                                           Shared staffing arrangement                            21                   27                 29
                                           Referral/return agreements wrth tertrary
                                             hosprtals and physrcran specralrst                   10                   15                 52
                                           Transitronidrversrficatron                             14                   83                 9.1
                                           Note Nonresponses result I” total across lanesof less than 100 percent

                                           Alliances in Mississippi and Nevada provide good examples of the vary-
                                           ing structures and benefits of rural alliances. Established in 1987, the
                                           Mississippi alliance includes a rural hospital with over 500 beds that is
                                           actively involved in developing a regional health care concept. Through
                                           linkage with this larger facility, smaller rural hospitals in northern Mis-
                                           sissippi have accomplished tasks that probably would have been impos-
                                           sible, given their limited resources. For example, one small hospital, as a

                                           Page 46                                                            GAO/HRB90+7   Rural Hospitals
                          Chapter 4
                          States and Hospitals Undertake   Strategies   to
                          Assist Rural Hospitals

New Technology,           Obtaining new technology and implementing a new management pro-
                          gram was the third most frequently reported strategy of hospital admin-
Management Programs       istrators. Of all the activities reported, 13 percent were efforts to
Found Useful              implement a new management program (for example, a quality assur-
                          ance program) or acquire new or update existing technology (for exam-
                          ple, CT scanners and ultrasound). Updating a hospital’s technology or
                          adding a new management program was a strategy considered to
                          improve the quality of care and financial status of the institution.

Group Purchasing          Concerned about the high cost of medical supplies and equipment, some
Arrangements Help Lower   rural hospitals have entered into group purchasing arrangements with
n,.,c,                    hospital associations, local or national alliances, and other independent
bU3L3                     groups. Small hospitals are at a competitive disadvantage because they
                          do not have the volume of services to purchase supplies in bulk or to
                          negotiate favorable prices in procuring equipment or maintenance

                          As of 1987, at least 165 group purchasing organizations (GPOS) existed in
                          the United States. Manufacturers give GPOs discounted prices because of
                          high volume purchases. From a 1986 survey, the American Hospital
                          Association estimates that hospitals with fewer than 50 beds used a GPO
                          to make about one-half of their purchases. Hospitals with 50 to 99 beds
                          reported that, on average, they made approximately one-third of their
                          purchases through a GPO. Also, there are indications from a 1988 survey
                          conducted by Group Purchasing News that smaller hospitals buy a
                          larger portion of their supplies and equipment through GPO%

                          Group purchasing arrangements are also offered through alliances (see
                          p. 45). Alliances are attractive to rural hospitals because they offer
                          group purchasing options as well as an opportunity for hospitals to pur-
                          sue other common interests. The Voluntary Hospitals of America, a
                          national alliance, reports that virtually all its member hospitals partici-
                          pate in its group purchasing program. This includes approximately 300
                          rural hospitals across the country. Several rural alliances we contacted
                          reported becoming members of regional or national GPOs to increase
                          their purchasing power.

                          Page 44                                            GAO/HRD90-67   Rural Hospitals
                                                  Chapter 4
                                                  States and Hospitals Undertake     Strategies   to
                                                  Assist Rural Hospitals

Table 4.2: Recruitment   and Retention   Activities    Reootted     bv Rural Hosoitals (1989)
                                                                  Percent of hospitals reporting        use by type of personnel
                                                                             Medical tech/              Physical        Radiology        Respiratory
Activity                                  Physician                Nurse     lab personnel             therapist       technician          therapist
Bonus program                                         9                 20                 8                     12 -
                                                                                                                    -___~-         7                  7
Child care                                            3                  8                 8                      8                8                  8
Flexible work schedule                                5                 58                32                    23                30                 25
Housekeeping services                                      a             1                 1                      1                1       ___~
Housina                                               5                  5                  2                     2                2
Job placement for spouse                               8                9                   4                  3                  3                     3
Loan forqlveness   orooram
                      -                               19               32                  13                 11                 13                    12
Loan program                                          24               30                  19                 15                 17                    14
Salary guarantee
       _                                              53                12                 12                 11                 10                   9
Scholarship program                                    4                56                 32                 27                 30                  27
Reimbursement for professional
  conferences                                         26                73                 67                 55                 65                  57
                                                  aFewer than 1 percent

                                                  A minimum income guarantee was the activity most commonly used to
                                                  recruit and retain physicians. For nurses and other staff, reimbursement
                                                  for professional conferences, scholarships, and flexible work schedules
                                                  were the strategies most often used. One hospital developed a successful
                                                  recruitment campaign in house after multiple attempts through a con-
                                                  sulting firm failed. Using a “wanted-poster” that offered a $5,000
                                                  reward for a family practice physician with obstetrical and surgical
                                                  skills, the hospital conducted a nationwide search (see fig. 4.1).

                                                  Page 42                                                               GAO/HRD9067    Rural Hospitals
                               Chapter 4
                               States and Hospitals Undertake   Strategies   to
                               Assist Rural Hospitals

                               Fifty-six percent of rural hospital CEXX reported that their hospitals
Rural Hospitals’ CEOs          were at risk of financial failure over the next 5 years. Many of these
Respond to Challenges          administrators were implementing strategies to improve their viability.
                               Over two-thirds (69 percent) reported they were engaged in at least one
                               activity designed to improve the hospital’s financial status, community
                               support, market share, or quality of care. The activities, which we clas-
                               sified into three areas, included (1) modifying services or staffing, or
                               developing outreach programs; (2) recruiting and retaining health pro-
                               fessionals; and (3) obtaining new technology or implementing a new
                               management program. Also, many rural hospitals are joining together in
                               local alliances and consortia in an effort to increase political influence
                               and share resources, we were told by rural health experts.

Modifying Services,            The majority (59 percent) of the activities” reported by hospital adminis-
Staffing, or Outreach Help     trators involved modifying services or staffing or developing outreach
                               programs, done to improve community support, market share, financial
Improve Hospital Status        status, or quality of care. While modifying services usually included
                               expanding the scope of services, modifying staffing usually meant
                               reducing staff. Hospitals expanded such services as wellness and health
                               promotion programs, outpatient clinic services, and services targeting
                               the elderly (e.g., cafeteria meals served to elderly residents). Community
                               fund-raising campaigns, focus groups, and health awareness programs
                               are examples of outreach activities cited.

                               Some of the more innovative activities, as reported by the rural hospital
                               administrators surveyed, were the following.

Hospital Slide Presentation/   To increase community support for the hospital, the administrator gave
Maternity Package              slide presentations to civic leaders on the economic and regulatory con-
                               straints it faced. To increase the hospital’s market share in obstetrics,
                               the administrator appealed to two groups of patients: (1) privately
                               insured women who were traveling to urban centers for care and (2)
                               working uninsured women who had difficulty paying for care but were
                               assumed to have the ability to pay. For both groups, the hospital created
                               a package of benefits and services that included homelike birthing
                               suites, birthing classes, home health visits following delivery, and a free
                               dinner for two for the new parents. For the working uninsured women,
                               t,he hospital also arrangtxd to finance maternity packages through a local

                               ‘A total of 500activitieswerrrcportr~d
                                                                    underfour separatecategories
                                                                                               in our questionnaire.
                                                                                                                  In some
                               casesthe sameactivity waswportedm merethanonecategoryForexample,healthprofessional
                               recruitmentactivitieswerewportvda impmvinga hospital’sfinancialstatusandits marketshare.

                               Page 40                                                    GAO/HRB9@67      Rural Hospitals
Chapter 4
States and Hospitals Undertake   Strategies   to
Assist Rural Hospitals

loan repayment and scholarship programs to place physicians in under-
served areas. States provide technical assistance in such areas as identi-
fying funding sources, writing grants, and analyzing data on hospital

Additionally, we identified states attempting to reduce the impact of the
rising cost of medical malpractice insurance. As malpractice costs have
increased-particularly     for such high-risk specialties as obstetrics-
many physicians and hospitals have ceased to provide these services. In
an effort to remedy this problem, 12 states (listed in table 4.1) have
enacted laws to encourage providers in both rural and urban areas to
continue delivering care to pregnant women. These provide (1) liability
insurance premium subsidies for providers who locate in underserved
areas or provide care to certain types of patients; (2) expanded liability
protection to those who provide free, voluntary, and emergency delivery
services; (3) state-funded indemnity for physicians who agree to provide
free or minimally compensated health care services; and (4) no-fault lia-
bility for certain catastrophic, birth-related injuries. Of these four
approaches, the premium subsidy has been the most widely used.

Page 38                                            GAO/HRD9067   Rural Hospitals
States and Hospitals Undertake Strategies to
Assist Rural Hospitals

                             Some states and local communities are taking steps to address rural hos-
                             pitals’ problems of low patient volume, limited revenue, recruitment and
                             retention of physicians, and regulatory constraints. State governments
                             offer financial and technical assistance and have changed regulations to
                             allow hospitals greater flexibility in developing a mix of services to meet
                             the needs of area residents. Also, many rural hospital administrators are
                             engaged in activities designed to improve their facilities’ status. For
                             example, hospitals are attracting patients by expanding outpatient clinic
                             services and developing health promotion and outreach programs.

                             While many of the state and local efforts appear promising, little infor-
                             mation is available centrally on the relative merit or impact of these
                             efforts. As a consequence, many hospitals are engaged in similar activi-
                             ties with little knowledge of the experience of other communities.

                             Some states are pursuing a combination of strategies to assist rural hos-
States Use Various           pitals that include regulatory reform, technical support, and financial
Strategies to Help           assistance. Others have changed regulations and laws to permit rural
Hospitals                    and urban hospitals greater flexibility in modifying their service mix or
                             diversifying their operations. Also, about half of the states have estab-
                             lished an office of rural health as a focal point to coordinate regulatory
                             and legislative activities affecting rural health care providers.

In Five States, a            Florida, Nevada, Oregon, Washington, and California are examples of
Comprehensive Approach       states that have formulated comprehensive assistance programs target-
                             ing the needs of rural hospitals. Three of the states target their efforts
to Problems of Rural         toward a subset of rural hospitals. Each approach is unique.
                         l   Florida targets assistance to rural hospitals with fewer than 85 beds
                             that are sole providers in a county with low population density (fewer
                             than 100 persons per square mile). These hospitals receive certain
                             exemptions from CONreview and have the option of being relicensed
                             under a new category created for them. Health professionals affiliated
                             with these hospitals are eligible for a loan repayment program.
                         l   Nevada’s legislature directed the state health department to develop
                             separate regulations for the licensure of rural hospitals with 85 or fewer
                             beds that are the sole institutional health care providers in low-
                             populated areas. The IGevada Rural Hospital Project, an alliance of rural
                             hospitals, received funding from the state to study and recommend pro-
                             posed licensing regulations to the state. In addition, Nevada authorized

                             Page 36                                           GAO/HRIM@67   Rural Hospitals
    Chapter 3
    Federal Pmgrama Need Targeted     Approach
    to Help At-Risk Rural Hospitals

    outreach or monitoring to assess whether the intent of the mechanism is
    accomplished. Selected hospital administrators’ comments on some of
    the federal programs are included in appendix IV.

    Recognizing problems in the coordination and monitoring of federal
    rural health efforts, HHSestablished ORHPwithin PHSin 1987. ORHP,
    authorized by the Congress in the Omnibus Budget Reconciliation Act of
    1987 (P.L. 100-203) has responsibility for coordinating the work of fed-
    eral agencies, state governments, and private sector organizations as
    they seek solutions to health care problems in rural communities. In par-
    ticular, ORHPis charged with the following responsibilities:

l advising the Secretary on the effects of HCFA'SMedicare and Medicaid
  policies on rural communities,
. coordinating rural health research within HHSand administering a grant
  program that supports the activities of the HHS-funded Rural Health
  Research Centers,
l providing staff support to the HHSNational Advisory Committee on
  Rural Health, and
0 developing a national clearinghouse for collecting and disseminating
  rural health information.

    Since its inception, OKHPhas worked to clarify federal policy and
    improve program administration relating to rural health care. For exam-
    ple, ORHPassisted the National Advisory Committee on Rural Health in
    preparing its 1989 annual report and recommendations to the Secretary
    of HHS.Recommendations were made on reforming Medicare hospital
    and physician payments, expanding federal programs to focus on rural
    health issues, increasing the quantity and quality of rural health
    research, and recnming rural health personnel.

    In addition to ORHP'Sfederal advisory role, it provides local health offi-
    cials and hospital administrators with information on federal rural
    health initiatives. In January 1990, for example, ORHPheld a workshop
    to allow rural hospital and health representatives an opportunity to
    assist HHSas it prepares to implement the Essential Access Community
    Hospital Program authorized by the Congress in OBRA89. At the time of
    our review, however, ORHPlacked adequate resources for operations and
    projects, including the development of a clearinghouse on rural health
    information. HHShas informed us that through its fiscal year 1990
    appropriations, ORHPnow has sufficient resources to support its

    Page 34                                          GAO/HRD9067   Rural Hospitals
                            Chapter 3
                            Federal Program    Need TanWed    Approach
                            to Help At-Risk Rural Hospitals

                            The Congress authorized the establishment of an NHSCfederal and also a
                            state-administered loan repayment program in December 1987 (P.L. lOO-
                            177). The programs will pay up to $20,00011 per year toward a partici-
                            pant’s outstanding educational loans if the recipient accepts an assign-
                            ment in a designated medically underserved area. The federal loan
                            repayment program is managed by PHS,and state programs operate
                            through NHsc/state cooperative agreements. Of the 10 states applying
                            for NHSC State Corps funding during fiscal year 1988, 7 were approved.
                            These states were Florida, Maine, New Mexico, North Carolina, South
                            Carolina, Texas, and West Virginia. According to PHSofficials, 21 states
                            submitted applications during fiscal year 1989, but because of funding
                            constraints, only the original 7 were approved.

                            Because the NHSCloan repayment program has been available only since
                            1988, its effectiveness is difficult to assess. According to Corps officials,
                            the program likely will have difficulty recruiting physicians because of
                            increasing competition from providers such as health maintenance

                            With the gradual phaseout of the federal NHSC,rural areas must depend
                            on state and local initiatives to attract health providers to their areas.
                            OBRA89 included provisions that may assist in this process. It established
                            a national fee scale for services provided to Medicare beneficiaries and
                            increased the incentive payment for physicians locating in underserved
                            inner-city or rural areas. The fee scale is expected to reduce the imbal-
                            ance in fees paid to medical versus specialty providers. However, com-
                            pensation is only one of several issues that make physician practice in
                            rural areas less attractive than in urban areas. Given that, it is unclear
                            whether improved reimbursement alone will be a sufficient incentive to
                            offset physician concerns about community amenities or the adequacy
                            of physician support staff.

Other Medicare Provisions    As discussed in chapter 2, rural hospital administrators are concerned
                             that Medicare’s prospective payment system places undue financial
Increase Hospital            pressure on the operations of rural hospitals. To reduce the financial
Revenues                     risk to rural hospitals, the Medicare program has, in addition to the SCH
                             provision, three other special reimbursement mechanisms that provide
                             additional sources of revenue to rural hospitals. Two of these, rural

                             “$26,000for servicein the IndiarlHealthService.

                             Page 32                                            GAO/HRB30-37   Rural   Hospitals
                           Chapter 3
                           Federal Progmms Need Targeted     Approach
                           to Help At-Risk Rural Hospitals

                           At the time of our review, the MAF project was delayed because of con-
                           cerns about reimbursement and state licensure or certification. Nine
                           Montana hospitals agreed to participate in the demonstration project,
                           three as MAFSand six as a comparison group. Of the three demonstration
                           MAFS,two are closed rural hospitals. Other Montana hospitals are reluc-
                           tant to convert to a MAF since they will be required to relinquish their
                           license for hospital beds. This would make it difficult and in some cases
                           impossible for the facilities to revert back to full-service hospitals if the
                           MAFproves unsuccessful.

                           Hospital licensure and certification is important for Medicare reimburse-
                           ment. To qualify for such reimbursement, hospitals must meet a specific
                           set of standards (that is, those of a state agency or the Joint Commission
                           on Accreditation of Healthcare Organizations). The MAF, however, will
                           lack the equipment and staff required for Medicare and Medicaid certifi-
                           cation. HCFAhas agreed to grant MAW a waiver from these standards,
                           allowing them to secure reimbursement, but as of April 1990, HCFAhad
                           not obtained the necessary approval from the Office of Management and
                           Budget. Also, upon completion of the project, it is uncertain whether the
                           new type of facility will be eligible for Medicare reimbursement.

                           The problems facing the MAF, as with use of mid-level practitioners,
                           involve federal reimbursement policy and state licensure/certification
                           laws. As such, satisfactorily resolving the issues is complicated by the
                           varying interests and objectives of all the entities involved. However,
                           the potential to learn whether a limited acute-care facility can fulfill a
                           need and gain public confidence is important. Given the problems facing
                           many small rural hospitals, HHSshould attempt to expedite the imple-
                           mentation of demonstration projects of this type.

NHSC: No Longer a Source   The major federal program designed to help rural communities attract
of Physician Supply for    physicians to their area is the National Health Service Corps. It was
                           established by the Congress within the Public Health Service in 1970
Rural Communities          (P.L. 91-623). NHX’S mission is to provide health personnel to areas,
                           populations, and facilities of greatest need, whether urban or rural.
                           Although Corps assignments are not made directly to rural hospitals,
                           NHSCphysicians provide patient care in rural areas and thus are a poten-
                           tial source of patient referrals for a rural hospital.

                           Currently about 60 percent of all Corps physicians have been placed in
                           rural areas. However, between 1986 and 1988, the number of Corps
                           assignees to rural areas dropped by nearly 400 to approximately 1,450.

                           Page 30                                            GAO/HRD-9O-67RuralHospitds
                             Federal Prolframs Need Targeted   Approach
                             to Help At-Risk Rural Hospitals

                             To remain viable institutions, some rural hospitals may need to alter sig-
Programs to Help             nificantly their mix of services. Two federal initiatives that help rural
Hospitals Modify             hospitals develop a service mix that reflects local needs are the Rural
Service Mix and              Health Care Transition Grant program and the Medical Assistance Facil-
                             ity (MAF) demonstration project. Our review of the programs found that
Recruit Health               (1) the transition grant program did not target at-risk hospitals that are
Providers Deserve            essential to their communities and (2) as of April 1990, MAF certification
                             issues were not yet fully resolved.
                             Also, funding for the National Health Service Corps (NHSC),the major
                             federal program designed to improve the supply and distribution of
                             health providers in rural and urban communities, has been significantly
                             reduced in the past decade. Thus, NHSCcan no longer can be relied upon
                             to supply physicians to rural areas.

Grant Program Needs          To increase patient volume and adapt to changes in the health care envi-
Additional Review Criteria   ronment, some hospitals have introduced or expanded their outpatient
                             and long-term care services. Other hospitals have converted into an
                             alternate type of health resource, such as an ambulatory care or long-
                             term care facility. The Rural Health Care Transition Grants, authorized
                             by the Omnibus Budget Reconciliation Act of 1987, were to assist rural
                             hospitals in planning and implementing projects to modify the hospitals’
                             type and extent of services. The legislation gave HCFAbroad authority to
                             make grants for a variety of activities, including recruiting physicians,
                             diversifying into new services, and developing cooperative efforts with
                             other health providers.

                             For fiscal year 1989, $8.9 million in appropriated funds was available
                             for the transition grant program and its evaluation. Not-for-profit rural
                             hospitals with fewer than 100 beds were eligible for up to $50,000 per
                             year for 2 years. In September 1989, HCFAawarded 181 grants under
                             this program (see app. III). The criteria for selecting transition grant
                             recipients are of particular concern, we believe. The review criteria
                             presented in the HCFAgrant announcement had little focus on either at-
                             risk hospitals that have the potential to be viable or hospitals consid-
                             ered essential to the delivery of health care in a community (for exan-
                             ple, SCIIS).~ Although thr Congress did not require HCFAto focus on at-

                             “Kev~ewersscoredhospitalapplicationsaccordingto (1) the applicant’sability to presenttheproblem
                             andneedsof the community;(2) thelikelihoodof successful impact;(3) theextentto whichthe
                             projectwouldimproveaccess 10care:(4) theproposeddegreeof coordinationamongthe hospital,
                             governmentandcommunityItwdws,andotherproviders;and(5) theprojwt’seffectonreducing

                             Page 28                                                      GAO/HRDYO-67     Rural Hospitals
                         Chapter 3
                         Federal Pro@am~ Need Targeted     Approach
                         to Help At-Risk Rural Hospitals

                         addresses the problem of low patient volume directly by encouraging
                         patient transfers and referrals to essential access hospitals. But several
                         characteristics of the program may limit its impact, First, it will assist
                         essential access hospitals in only seven states. Although isolated hospi-
                         tals that are also financially distressed are relatively few (see app. II),
                         they appear scattered through at least 32 states. Second, no criteria are
                         specified for selecting states to receive grants. Consequently, states with
                         a relatively large number of distressed and isolated rural hospitals could
                         be rejected, while less needy states are funded. Finally, although the
                         designated essential access facilities will receive the same Medicare pay-
                         ment as SCHS,they are not otherwise targeted for special consideration
                         under other federal efforts, as discussed below.

                         The Rural Health Clinic Services Act of 1977 (P.L. 95-210) includes pro-
The Potential of the     visions that assist clinics in using mid-level practitioners (for example,
Rural Health Clinic      nurse-practitioners and physician assistants) in areas that have a
Act Not Fully Realized   shortage of physicians. The RHCact allows a clinic to bill Medicare and
                         Medicaid directly for services provided to beneficiaries by mid-level
                         practitioners. RHCScan be either provider-based facilities (that is, oper-
                         ated by a hospital, skilled nursing facility, or home health agency) or
                         independent clinics. To qualify for the reimbursement, an RHCmust be
                         located in a medically underserved rural area and staffed with mid-level
                         practitioners at least 50 percent” of the time. Hospital-operated clinics
                         are reimbursed on a cost-related basis, at the same rate paid for out-
                         patient services under Medicare.

                         Some rural health experts believe that RHCScan assist rural hospitals
                         with problems of declining patient base and physician coverage. For
                         example, a hospital closing its emergency room or entire facility could
                         convert the emergency room to an RHC.The services of the clinic could
                         be provided at lower cost, and otherwise idle space could be used to
                         maintain some level of services. With the assistance of a physician on
                         staff, the clinic could function as a full-service, 24-hour emergency room
                         or an urgent care facility open only during specified hours.

                         When a hospital operates an RHC,it may be collocated with the hospital
                         or free-standing. Because payment is cost based, the RHCcould help a
                         hospital cover its fixed costs. Despite this financial advantage, only 14
                         of the 483 currently designated RHCSare operated by a hospital (see

                         “OBRA89   loweredthcrequlrement

                         Page 26                                           GAO/HRD-9067   Rural Hospitals
                              Chapter 3
                              Federal Pro@unsNeed Targeted      Approach
                              to Help At-Risk Rural Hospitals

                              Over 40 percent (61 hospitals) of SCHSwith fewer than 50 beds experi-
                              enced losses in at least 2 years during fiscal years 198587.4 Our analysis
                              showed that Medicare losses are not the major force driving these hospi-
                              tals’ financial distress. Even if Medicare had paid under-50-bed SCHS
                              their full costs in fiscal year 1987, many still would have experienced
                              substantial losses.” Thus, some of these hospitals and communities will
                              need more than increased Medicare payment to maintain rural residents’
                              access to hospital care.

SCH Designation Current ;ly   Not all hospitals that are essential to their communities are eligible
                              under the current criteria. Criteria for SCHeligibility are based on dis-
Not a Good Indicator of       tance and other factors related to the accessibility of alternative hospi-
Hospitals’ Importance to      tals or the community’s dependence on the hospitals. Designation is
Community Access              contingent on a minimum distance to the nearest “like” hospital, but like
                              is defined in the regulations as any short-term acute-care hospital,
                              regardless of the services provided.

                              Given the current definition of “like,” a hospital may be excluded from
                              designation even though it is an area’s sole provider of essential ser-
                              vices. For example, a 153-bed hospital that provided obstetrical care
                              was denied SCH status because of the presence of a 23-bed hospital
                              within 25 miles, although the other hospital did not provide obstetrical
                              care. A similar situation could occur with respect to the provision of
                              emergency services. Because of situations like these and to better assure
                              that all hospitals providing essential services to their communities are
                              eligible for SCHdesignation, we believe HCFA should examine its SCHeligi-
                              bility criteria.

SCH Provision Needs           Our review of SCHapplications at two regional offices and telephone con-
Greater Administrative        versations with officials of some designated and potentially eligible hos-
                              pitals suggest that potential applicants for SCHstatus lack sufficient
Attention                     information about the application process. Currently, not all potential

                               ‘If thegroupis expandedto Includeall under-50.bedhospitalsthat (1) wereeverdesignated    SCHs,
                               12)meetcriteriafor designation,
                                                             or (3) werejudgedto beeligibleby the court but that are not yet
                               designated,weestimatethereart’ at least91that lostmoneyin 2 or moreyearsduringfiscalyears
                               “OfSCKsunder50beds,25pa-centhadnegativetotal margins(expenses      exceediigrevenues)of 9
                               percentor morein fiscalyear1987.HadMedIcare  paidthese hospitalstheir full Medicarecosts,these
                               hospitalsstill wouldhavehadnegativetotal marginsof 7 percentor more,indicativeof continuing

                               Page 24                                                       GAO/HRD90.67
                                                                                                        BurnI Hospitals
Chapter 3
Federal Progmma Need Targeted     Approach
to Help At-Risk Rural Hospitals

This payment mechanism was designed to recognize the special circum-
stances of sole community hospitals by considering their hospital-
specific costs. The mechanism used to pay SCHs,like all hospitals under
PPS,uses predetermined rates. Instead of being based on the average
costs of all rural hospitals in 1981 (and updated annually), however, SCH
rates are based largely on the individual hospital’s 1982 costs2 At the
time of our review, 372 hospitals were designated SCHS.

Many SCHShave experienced financial losses on their Medicare patients
because their costs increased at rates higher than the adjustment factors
used to update 1982 costs. For example, in fiscal year 1987 one-quarter
of SCHShad Medicare operating costs that exceeded their PPSrevenues
by 16 percent or more.? One explanation for this is that SCHson average
have had significant declines in inpatient volume, which tend to increase
their per case costs. To correct this payment rate problem, OBRA89
increased reimbursement to designated SCHsby allowing them to receive
payment based on the highest of either (1) their updated 1982 costs,
(2) their updated 1987 costs, or (3) the rural hospital PPSrate.

While OBRA89 increased Medicare payment rates by allowing a hospital
to receive the highest of three rates, losses on Medicare patients will still
occur for SCHS whose costs continue to increase faster than the adjust-
ment factor that will be used to update the base year costs. There is a
safeguard, however, to protect hospitals experiencing per-case cost
increases that result from declines in volume. Specifically, if such vol-
ume declines are more than 5 percent and are due to circumstances
beyond the hospitals’ control, Ku-eligible hospitals may apply for addi-
tional reimbursement, referred to as a volume adjustment. This provi-
sion has been available to hospitals since fiscal year 1984, but is seldom
used. Only 8 hospitals received a payment and only 23 applied to HCFA
for the adjustment between April 1985 and February 1989. However, at
least 114 designated SCHSexperienced declines of 5 percent or more in
discharges during fiscal year 1987 alone.

HCFA   has not investigated why so few hospitals have applied for the vol-
ume adjustment. We telephoned officials of some hospitals that might be
eligible for SCHstatus and found that many were unaware of or misun-
derstood the volume adjustment provision. Effective October 1989, how-
ever, HCFA attempted to streamline and expedite the application process

“BeforeOBRA89,paymentwashawdonthesumof 75percentof the hospital’s1982costand25
percentof theregionalpaymentrate

Page 22                                              GAO/flRDM7    Rural Hospitals
Chapter 3                                    -

Federal Programs Need Targeted Approach to
Help At-Risk Rural Hospitals

                          A number of federal initiatives are available to help rural hospitals
                          increase their revenues, attract patients, and recruit health profession-
                          als. To date, little attention has been given to determining the overall
                          impact of these initiatives. In addition, the one federal provision
                          designed to help rural hospitals that provide the sole source of care to
                          Medicare beneficiaries has not adequately protected these hospitals
                          from large losses on Medicare patients.

                          Also, some rural hospital administrators have considerable difficulty
                          getting information they need to apply to federal programs. In two
                          instances, hospital administrators spent about $10,000 each for consul-
                          tants to help them apply for SCHstatus.

                          Most federal efforts that assist rural hospitals are administered by HCFA
                          and structured to provide additional Medicare payment to hospitals that
                          meet eligibility criteria. As a consequence, HCFA'Smain administrative
                          effort is to determine which hospitals are eligible for payment. Of
                          course, accurate payments are an essential element of any federal pro-
                          gram. However, with the SCHand rural health clinic (KHC) provisions,
                          HCFAplaces relatively little emphasis on such activities as outreach,
                          technical assistance, or evaluation of whether the provisions are meet-
                          ing their intended purpose. Moreover, there is no office monitoring the
                          combined impact of federal provisions assisting rural hospitals.

                          Recognizing problems in the coordination and monitoring of federal
                          rural health efforts, the Department of Health and Human Services
                          (HHS) established the Office of Rural Health Policy (ORHP)in August
                          1987.1 Our review suggests that HHScould better use ORHPin monitoring
                          and evaluating federal rural health initiatives.

                          We identified 10 initiatives within HHSthat address rural hospitals’
Ten Federal Initiatives   problems by (1) providing ways for them to lower their costs per
Assist Rural Hospitals    patient, (2) recruiting federally sponsored health providers to under-
                          served areas, (3) increasing their Medicare payment, or (4) providing
                          grant funding, information, or technical assistance. The specific efforts
                          are listed in table 3.1 with a notation identifying the major problems
                          they address. The initiatives do not represent an exhaustive list of fed-
                          eral efforts that are available to assist rural hospitals, but they are the
                          major efforts that specifically target rural hospitals.

                            Chapter 2
                            Corwtrainta  and Challenges   Facing
                            Rural Hospitals

Medicare’s Prospective      PPSsets payment at a predetermined amount, based on the 1981 average
                            cost of treatment for each patient diagnosis, adjusted for certain hospi-
Payment System Limits       tal characteristics and updated annually. Hospitals with costs below this
Hospital Revenue            amount make a profit from the system; those with costs above, lose. In
                            general, rural hospitals with fewer than 100 beds have not fared as well
                            as larger hospitals under this system.

                            Urban and rural hospitals are paid based on standardized amounts that
                            represent the average adjusted cost of treating Medicare patients in
                            urban and rural hospitals, respectively. Because rural hospitals have
                            had lower average costs than urban hospitals, their payment is based on
                            a standardized amount that is about 11 percent lower (in fiscal year
                            1989) than the standardized amount used to pay urban hospitals.

                            This disparity in payment rates was the focus of much concern by rural
                            hospital administrators we surveyed. They contend they must pay the
                            same prices for supplies and equipment as their urban counterparts, and
                            sometimes offer at least equal wages to attract personnel, yet are paid at
                            a lower rate. Several administrators expressed concern that current pay-
                            ment rates perpetuate inequalities in the resources (i.e., human and
                            technological) available in rural hospitals relative to urban facilities.

                            For the distressed hospitals, PPSoperating costs exceeded PPS revenues,
                            resulting in a median loss for fiscal year 1987 of 12 percent. This com-
                            pares with a median profit of 4 percent for the successful hospitals.
                            While losses on the hospitals’ Medicare patients were significant for the
                            distressed hospitals, their average losses on other patients were consid-
                            erably larger. Consequently, increases in Medicare payment alone are
                            not likely to result in profits for the most distressed hospitals.”

Economic Environment        Most hospitals, and particularly small ones, depend on nonpatient reve-
Affects Hospital Revenues   nue (that is, public or private funds) to make up for financial losses on
                            patient care.’ Two factors that affect the availability of nonpatient reve-
                            nue are the community’s economic environment and the hospital’s abil-
                            ity to secure public or private grants or donations.

                            “For example,if Medicarepaidthe,dmtressed hospitalsfor their full Medicarecostsin fiscalyear
                            1987,overallcostsstill wouldhavr rxceededrevenuesby 7 percentor morein half of thesehospitals,
                            ‘This is evidentfroma comparison of hospitals’operatingmargins(a measure     of profitabilityon
                            patientcare)with their total margins(a measure of their overallprofitability).In general,hospitals’
                            operatingmarginsareloww thanthw total margins,andthe differenceis greatestfor thosewith
                            fewerthan 50beds.

                            Page 18                                                          GAO/HRB9087       Rural Hospitals
                       allowing the hospital to decrease its costs per patient and improve

                       Hospitals are ultimately dependent on physicians to maintain or
                       increase their patient volume; in a small rural hospital, the loss of a sin-
                       gle doctor can cause a serious volume decline. Therefore, problems in
                       recruiting and retaining physicians likely contribute to low patient vol-
                       ume in many hospitals. Hospital administrators (CEOS)we surveyed cited
                       recruitment and retention of physicians as a major challenge; about one-
                       third reported spending at least 20 percent of their time on physician
                       recruitment activities.

                       Recent survey research2 indicates that low patient volume is in part a
                       result of patient preferences and need to seek care elsewhere. Smaller
                       hospitals, more than others, must combat the consumer belief that “the
                       bigger the hospital, the better” in order to attract patients. A more lim-
                       ited scope of services (discussed below) also works against these facili-
                       ties in competing for patients.

                       Distressed rural hospitals” maintain a more limited scope of services and
Limited Services and   fewer technological resources than successful hospitals. Both factors
Technology Reduce      make it difficult for a distressed hospital to attract patients, physicians,
Ability to Compete     and physician referrals. In addition to lower patient volume, distressed
                       hospitals had, on average, fewer doctors on their medical staff and were
                       less likely to provide inpatient obstetrical care or intensive care or to
                       have available ultrasound or CT scanner technologies.

                       Often, as with low patient volume, limited scope of services and fewer
                       technological resources are the result of some problems and the cause of
                       others. For example, a limited scope of services may stem from an
                       inability to recruit or retain a mix of specialist physicians, less technol-
                       ogy from an inability to obtain capital needed to modernize or acquire
                       expensive equipment. Both problems may cause a hospital’s loss of

                             FarmBureau,HealthCarein RuralIllinois,1989,p. 46,andCommunityHealthServices
                                 Project,unpublisheddatafrom18rural communitysurveysconductedbetween1986
                       “Wedefineddistressedrural hospitalsasthosewith a 3-yearaveragetotal marginin thebottom26
                       percentileof rural hospitalswith fewerthan 100beds.

                       Page16                                                     GAO/IJRE-W7     Rural Hospitala
Chapter 1

To identify state policies that have the potential to affect rural hospitals
positively, we used primarily the results of a recently completed survey
of all state health agencies conducted by the National Governors’ Associ-
ation. Along with this survey, we used supporting evidence identified
through a search of the literature. In addition, we interviewed health
officials in 27 states by telephone. Our work was performed from July
through December 1989 in accordance with generally accepted govern-
ment auditing standards.

Page 14                                           GAO/HRD-90-67   Rural Hospitals
              chapter 1

              potential to address major problems (for example, recruitment and
              retention of physicians) for rural hospitals. Although it was beyond the
              scope of this study to completely evaluate each program described, we
              identified problems that were the most evident.

              By making suggestions on how to improve the operations and impact of
              federal programs, we did not intend to imply that every rural hospital
              should remain open as a full-service, acute-care facility. In some
              instances, the closure of a hospital located near another hospital offer-
              ing a comparable range of services can strengthen the viability of the
              remaining facility. But, in other cases, a hospital’s closure may jeopard-
              ize access to care, and efforts to assist the facility or community may be

Methodology   To identify the major problems of rural hospitals considered at risk of
              failure, we compared the characteristics of successful hospitals with
              those of financially distressed hospitals. In addition, we reviewed
              related literature. To obtain information on rural hospitals from the per-
              spective of residents of rural communities, we made site visits to several
              rural hospitals and surveyed rural hospital chief executive officers

              Our comparison of successful and distressed rural hospitals was limited
              to those with fewer than 100 beds because of the greater likelihood of
              financial distress and closure in this group. Using Medicare automated
              cost report data averaged over a 3-year period, we defined successful
              hospitals as those with total profit margin9 in the “top” 25 percentile of
              all rural hospitals with fewer than 100 beds (N=406). We defined finan-
              cially distressed hospitals as those in the “bottom” 25 percentile

              To identify the distinguishing characteristics of successful and dis-
              tressed hospitals, we compared data on patient mix, bed size, patient
              volume, economic environment, geographic location, services, and physi-
              cians. For this analysis, we used data from the American Hospital Asso-
              ciation’s (AHA) Annual Survey, the Health Resources and Services

              ‘The total marginis a commonlyusedmeasureof overallprofitability.It is calculatedasfollows:
              (totalrevenue- total costs)/totalrevenue.Eachhospital’stotal marginwasaveragedovera 3.year
              periodto providea morestablemeasure   of profitability thana l-year figure.
              “Hospitalswerethenexcludedfromthesuccessfulgroupif theyhad2 yearsof negativemargins,and
              wereexcludedfromthedistressedgroupif theyhad2 yearsof positivemargins.

               Page12                                                     GAO/HRD90-67
Chapter 1


               Faced with troubled rural economies, fewer resources, and a competitive
               health care environment, rural hospitals are experiencing increasing
               financial distress. As a consequence, many rural hospitals have closed
               since 1980, and others are considered at risk of closure over the next
               few years. The Chairman of the House Appropriations Committee asked
               that we identify strategies and programs that could assist rural hospi-
               tals considered to be “at risk.” There is concern that rural hospital clo-
               sures may jeopardize access to health care services, particularly for
               elderly and low-income residents who may have greater difficulty trav-
               eling to a neighboring health care facility.

               Rural hospitals are operating in a health care environment that has
Background     changed dramatically in the last 2 decades. Scientific and technological
               advances, as well as changes in reimbursement policies, have greatly
               altered medical practice patterns. New technologies have shifted treat-
               ment for certain conditions from inpatient to outpatient settings, reduc-
               ing inpatient volume. Although overall use of inpatient services has
               declined, the patients who are hospitalized tend to be more severely ill
               than patients in prior years and require a more complex range of ser-
               vices. Further, modern roadways and public transportation systems
               have reduced the isolation of many rural communities. Residents of
               rural areas now have greater mobility and, therefore, can obtain health
               services from more distant areas. All of these factors contribute to rural
               hospitals now facing a more competitive environment than when they
               were built.

               Many rural hospitals were built in the 1950s with federal matching
               funds made available through the Hill-Burton Act of 1946.’ But the need
               for hospital beds has declined due to changes in the health care indus-
               try. By the mid-1970s concern about the growth in the number of hospi-
               tal beds, services, and costly technology led to passage of the National
               Health Planning and Resources Development Act of 1974 (P.L. 93-641).
               The act required hospitals to obtain a certificate-of-need (CON) for capi-
               tal expenditures on physical plant, equipment, and services. Although
               federal CON requirements were discontinued in 1987, many states con-
               tinue to regulate the growth in hospital equipment and services. Federal
               and state regulatory efforts have attempted to control health care costs
               by limiting large capital investments to those considered needed.

               ‘TheHospitalSurveyandConstructionAct of 1946(I’.L.96-499).

               Page 10                                                  GAO/HRLS90.67   Rural Hospit&
Figures   Figure 3.1: Overall Profitability of SCHs and Other Rural                23
               Hospitals (Fiscal Year 1987)
          Figure 3.2: Number of Scholarships and Year First
          Figure 4.1: Physician Recruitment Poster                                 43


          AHA        American Hospital Association
          CEO        chief executive officer
          CON        certificate-of-need
          GPO        group purchasing organization
          HCFA       Health Care Financing Administration
          HHS        Department of Health and Human Services
          MAF        medical assistance facility
          NHSC       National Health Service Corps
          OBRA 89    Omnibus Budget Reconciliation Act of 1989
          ORHP       Office of Rural Health Policy
          PHS        Public Health Service
          PPS        prospective payment system
          PKIPAC     Prospective Payment Assessment Commission
          RHC        rural health clinic
          SCH        sole community hospital

          Page 8                                           GAO/HUD-9087   XhwalHospitals

Executive Summary                                                                                   2

Chapter 1
Introduction           Background
                       Objectives, Scope, and Methodology

Chapter 2
Constraints and        Low Patient Volume Raises Costs, Leads to Financial
Challenges Facing      Limited Services and Technology Reduce Ability to                           16
Rural Hospitals             Compete
                       Limited Hospital Revenues Reduce Profitability                              17
                       Regulatory Constraints: A Major Concern to Hospital                         19

Chapter 3                                                                                          20
Federal Programs       Ten Federal Initiatives Assist Rural Hospitals                              20
                       The Sole Community Hospital Provision: Insufficient to                      21
Need Targeted              Protect Essential Hospitals From Risk of Closure
Approach to Help       New Legislation Offers Alternative Designation,                             25
At-Risk Rural              Increased Support for Essential Hospitals
                       The Potential of the Rural Health Clinic Act Not Fully                      26
Hospitals                  Realized
                       Programs to Help Hospitals Modify Service Mix and                           28
                           Recruit Health Providers Deserve Attention
                       Coordinating Office Should Determine Impact of Federal                      33

Chapter 4                                                                                          36
States and Hospitals   States Use Various Strategies to Help Hospitals                             36
                       Rural Hospitals’ CEOs Respond to Challenges                                 40
Undertake Strategies   Many Initiatives Promising, but Impact Unclear                              47
to Assist Rural

                       Page 6                                            GAO/HRDW67   Rural Hospitals
                           Medicare’s sole community hospital (SCH) provision is a major federal
                           effort that assists rural hospitals that are the only source of care for
                           Medicare beneficiaries. However, it has not adequately protected them
                           from large losses on Medicare patients. Although improved reimburse-
                           ment under the Omnibus Budget Reconciliation Act of 1989 should alle-
                           viate large Medicare losses, many SCHSlikely will still experience
                           problems as a result of losses on other patients. Also, current SCH eligi-
                           bility criteria do not consider all hospitals whose closure would cut off
                           access to essential hospital services.

                           Another federal provision, the Rural Health Clinic (RHC) Services Act,
                           could help rural hospitals to develop outpatient clinic services and use
                           mid-level practitioners (e.g., physician assistants). RHCS are reimbursed
                           on a cost-related basis for services provided to Medicare and Medicaid
                           beneficiaries. However, despite the financial advantages, only 14 of the
                           483 RHCS are operated by a hospital. Reported barriers to the growth of
                           RHCS include a lack of information disseminated on the program and
                           restrictive state certification procedures for mid-level practitioners.

                           The Congress, through the Rural Health Care Transition Grant Program,
                           made grants available to help rural hospitals develop a mix of services
                           that reflect the needs of their areas. However, criteria for selection of
                           grant recipients did not focus on financially at-risk hospitals that are
                           essential to a community. Without more effort by the Congress and the
                           Health Care Financing Administration to target funding, financially
                           secure hospitals may receive federal support at the expense of at-risk,
                           essential hospitals.

                           Federal efforts that assist rural hospitals are not well linked or evalu-
                           ated for their combined impact. In addition, the SCH and RHC provisions
                           are not sufficiently monitored. Recognizing problems in the coordination
                           and monitoring of federal rural health efforts, the Department of Health
                           and Human Services (HHS) established the Office of Rural Health Policy
                           (ORHP). Although OKHI' is in a unique position to independently assess the
                           operations and combined impact of federal initiatives, it has not been
                           directed to do so.

States and Hospitals       Most states provide some assistance to rural hospitals. About half of the
Initiate Efforts to Help   states have an office of rural health, and some states have changed laws
                           and regulations to permit hospitals greater flexibility in licensing new
Rural Hospitals            combinations of services. Additionally, a few states have a broad range
                           of planning and technical support efforts to assist rural hospitals.

                           page4                                             GAO/HRD+O-67RuralHoepiti
Executive Summary                  -

             As a consequence of increasing financial pressures, a number of rural
Purpose      hospitals have closed in recent years and many more are considered at
             risk of closure. There is widespread congressional concern that these
             closures may jeopardize access to medical care, particularly for elderly
             and low-income residents who may have difficulty traveling to another
             facility. In light of these concerns, the Chairman of the House Appropri-
             ations Committee asked GAO to identify strategies and programs that
             could help at-risk rural hospitals.

              This report identifies programmatic efforts that attempt to address
              major problems confronting at-risk rural hospitals. The Omnibus Budget
              Reconciliation Act of 1989 established new federal initiatives and
              refined existing efforts. If funding is appropriated, the new initiatives
              will significantly increase assistance to rural hospitals. Many problems,
              however. remain unresolved.

              Rural hospitals are operating in a health care environment that has
Background    changed dramatically in the last 2 decades. Changes include growth in
              costly technology, shifting of services from inpatient to outpatient set-
              tings, and establishment of Medicare’s fixed-price prospective payment
              system for inpatient services. In addition, due to improved roadways
              and public transportation systems, rural residents are considerably
              more mobile and have greater choice in where they obtain health care

              Although the majority of rural hospitals have maintained their financial
              viability in this dynamic environment, some have not. From 1980 to
              1988,408 U.S. hospitals closed-half in rural areas. For an initial
              assessment of the problems of at-risk rural hospitals, GAO compared the
              characteristics of successful and distressed small rural hospitals and
              interviewed a number of rural hospital administrators. To identify pro-
              grams and strategies that address the problems of rural hospitals, GAO
              interviewed federal health officials, reviewed findings from a nation-
              wide survey of state health agencies, and surveyed rural hospital
              administrators. Another GAO report, soon to be issued, will present find-
              ings from an in-depth study of the causes and consequences of rural hos-
              pital closures.

              Page 2                                            GAO/HBD9087   Rural Howith