b” United States General Accounting Office .L Report to the Chairman, Committee on * ’ Appropriations, House of Representatives ,.’ June 1990 RURAL HOSPITALS Federal Leadership and Targeted Programs Needed MO Egz&+~~~ .. Human Resources Division B-229962 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 remain. Page 3 GAO,OIRD-9087 Rural Hospitals FxecutiveSummary 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 recommendations. Page5 GAO/HRD90-67 RuralHospitals -. contents Chapter 5 48 Conclusions, Conclusions Recommendations to the Secretary of HHS 48 49 Recommendations, Matter for Congressional Consideration 50 Matter for Agency Comments and Our Evaluation 50 Congressional Consideration, and Agency Comments Appendixes Appendix I: Distribution of Rural Health Clinics by State 56 (1989) 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 rntroduction 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 urban/rurallocation. “Whenfiscalyeardataarecitedm this report,wereferto hospitaldatafor costreportingperiods beginningduringthat fiscalyear “This ISthedefinitionof rural gewrallyusedby Medicare’s PPS. Page 11 GAO/lfRB9O87 Rural Hospitals Chapter 1 Introduction 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, Inc. 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 groups,respectively. Page15 GAO/HRD-9047 RuralHospitals 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. 4Uncom~nsated careumsistsof baddebtandcharitycare. “AmericanHospitalAssociation. unpublisheddata. 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’ problems. 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 services. 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 applicants. 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 1987) 6 4 2 0 -2 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 r!Se”“e 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 FederalProgramsNeedTargetedApproach 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; and 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 (1982). Page27 GAO/HRB9&67RuralHospitals Chapter3 FederalPro@am Need Targeted Approach to Help At-Risk Rural Hospitals risk or essential hospitals, such criteria were not precluded by the legislation. 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 hospitalsunder100bed? 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~ 1900 1350 1200 1090 900 790 9ca 490 300 190 0 1977 1978 1979 1980 1991 1982 1983 1984 1985 1988 1997 19s9 1989 lee0 1991 1992 Year 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 Chapter3 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 initiatives. 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 isolatedareas 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 “8111pendlng ‘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 services. 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 businesses. 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. ...’ l/iii!. 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- olina.andNewHampshiru 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 activities. 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 initiatives. 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 support. 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 process; . 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 distressed. 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 warranted. 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 (continued) 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 r ofthecx3mbmtofHealthtiFbsMnServices ~~iceDmftRmort, Tural HpsDitals:" Overview 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. ~~s~ionbutthat~~1Nalhospitalsare~encing 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@asiscmeMluatirgxðerthe 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 thelast2yeaxs. Page 67 GAO/HRD9047 Rural Hospitals AppendixV CommentsFromtheDepartmentofHealth and&man services Inadditicm,itisaFparent thatc9Dviewsthe Pw==of-FACH/RFCH primari.lyesavehicletopmvickgnntfur&toshomupEACXs, rm access h&taW1. Webelievethattkepmqremisinterrded toeamplish~~thanthisendieinfactfocllsedanthe develqm!mtofmmlMthcarenetworlcsandnnalprimaryce.re hospitals. . . Tllt?EAcHpuiprogrannisintended D&al&an accesetoccst-effecti.ve pralityhea&hcareservicesinS -.Itprm4cksamsansfor smallrurelk6pitalstomminfinanciallyviablebyamertig to "Nlal n-leseRFcHstilestabliehendmintaintrarrsfer, referral, al-d -& agreementswithEsserhialpEcgs~ty Hospitals,largerinsti~i~whicfimairhaina-mnprehensiverange ofinpatiatacutecare-ices. Wekelievethatthemetmcbxkyof the syetem ti the devellqrent Of sWh IEtamrks will ensu?x thatthefuJ.1 range ofheelthcam -ices is availableto rurelMedicare beneficiaries. ItisnoteworthythatGAolimiteditsstudytohospitalswithfewerthan 1OOheds andthus didnot -iderthe finer&al status of the 62 axrentlyapproveds(ltsthathavermrethan99beds.wecannutagreewith generalized~usiollscnthenrleauacvorMeadministraticolofany F~inwhichnearly17percentofUelargestandmostlikely 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 andmarketsharegenerallydoiderrtifyhospitalsthatserveasthesole 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. Forallofthe~discussedabove,wedonotagreethatSCH classification sbculd be based on a hospital's provision of an %eeential" service. The report. identifies one instance inwhichao investigators f~that=hospitalwasdeniedSCHstatus~etotheprmcimityof anotherhospital,~~theotherhmpitaldidnotprwideobstetrical 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 that,"Accessto-doesnotappeartohavebeM~iredforMedi- beneficiaries who reside in rural areas in the five states (&x&d)." InresponsetotheCADassertionthattheSCHcriteriaaretmnarrow,we 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 AppendixV Comments kom the Department of Health and Human Services Ilsdiscussedaknre,"netfinancialloss"is~asandcritericnforthe ~~fgr.+fm3sn3isoftenmtarelbble~ofthe 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 imJactofthsvariwssffortstoassist.mml 0 hFY1989,ORHPawxdadammtract to the Natimal Govwmx's zc+sdaticmtodescribethe~~tivestateplogramsthat assist rural hospitals and r2umanitis; 0 omPsb3ffhaveparticipated.insareralseninars spcor;oredby*e Daparbnwt that l3ri.q tcqsthsr Stats firstname.lastname@example.org to wcharqe infolzxrEkion cm state ?i-ural hsalti pl-qlas: 0 each year, theCEW staffmkes10to 20presmtaticnr;toState hcspital asscciatiowamIthsirnralhospitalamtibsmy grapStoaFprisethmofFederaldevslqmmts: Page 73 GAO/HlUMM37 Rural Hospitals AppendkV 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 exauple,inmsofthe~iascxu9Pidicatxdtbathvkonthe informticnclearhqbxsewas at a ~because0fthel.a&0fan ~~tim(a~em~~ml~existsasprwicusly~). 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 SecretaryOfHHsiand . . oachnuusters: 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 and~ti~ard~ccsltarplatedforea~oftherural~~care --by=J. InthediscussionoftheMedicz3lAssistame Facility (M) deammbation Now on pp. 28,30 in~(pageS44to46),~statgthatHcFaneedstoresolve ~~irdxusanentissussincrdsrto-abeadcntheprojsct. 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 standards. 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 andHumanSewices 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 eachyeK,ORHPbrinFtogethermostofthekeypeopleinvolvedinrural health-inthe Departmentto~rkwithruralhaalthresearcf centersardaordinate research efforts. Ncm-gwernwnt repres&zatives invclvedinnlralhealthreswEh anddez0x&aticmproject.s, suchas the RobertwmdJ&nsonFoundation,oftenattendaswell. 'Ihe ORHPhas heen extensively involved in the design ard evaluation of the RHl'PandamtimxstomonitorandworkwithctherHHSaqxmenbi.n 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 -icesthatareessential. Now on p. 34 Ihemnwrtcnpage52,seccoldparagraFh,thatcharacterizesthe~as beingmnstrained init.3 qerationstzecauseof thelackof adirect apprcpriation is not accurate. lb2 irnwzxd FY1990 appmpriationhas prwedsufficienttosupportthe~operationsandp~-go. !meoRHPisnai -tially selfsupporting. page74 GAO/'HRB90-67Rural Hospitala i GWshculdrecognizethattheIWicamFaogrrrmmsmtintmSdto~ itselfwitht.lxdi.stribtimofbalthr. -tocaremaybe gz-eatlyaff~bythelackofan dzstetrical service, emqency depmWmtoreventhela&ofak6pital,hh~pnblemsaxenot witMn#e&50inoftheMadicamprcgmm. H!sp7qpyareascloaeas theDs.peedauesto-tingandsupportin3health~ whereitdcesmtalreedyexist. CWgSSSWillhavetieMdneW legi.slaticmiftheFEdamlGcnmmmt istokechargedwiththa distr!Jxltionofhealth reaaxcsmanaticmalbasis. Several points mst be noted in discussirq the issue of prioritiziq grant awards.First,asGiQiMicates,CmqressdidmtimluzIesu& pref- inthelegislation. Ininpl~ths~HcFAwas awareofthewidevarietyof~~innvalhospitalsthat~ citedinthelegislaticmmiccrmaitteereportas- forthepY.zgmL HcFAinplementedthe prcgmminmkrtohelpmralhcspiixlswithanyof thecitedpxblenm Tims,~balieveduvltwawereii@emantirq axymssimalintent. Finally,HCZ'Aisnctawamofawide-rarqingccxmsus of Mca~rs of CQlQUnityWttl-needsiurldoestihavethe resaurestopezf~an lrdependent-of-needsinwerynltal~ty.In 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 availablet.otiCFA. Page72 GAO/HBD9O87 Bud Hospitals AppmdixV CommentsFromtheDepartmentofHealth andHummSemices we have pIxpar& an iswc%KzforthemiderReinsxasanent~that givesdetailedinstm&ionscmallprovisians~ SCHS. Tl-lelIBIlUl issuameMdbeprirhedanddistrMshortly. . . . . iatoincl eh (21 Q itals that are sole- iders of an essential service fe.s. enem-. cketetrics~: and Wedomt~withthereport'smnclusionthatthes(Heligibility criteriadonotadeq&xlyidentifyruralhcspitalswherecl- aaild jmpairMedica.rekeneficiaries~ accesstoessential.balticareswices. CXJ is critical of the am3mt gualifyirg criteria because Wiay depend on clistmmardmarketsharetoi~fy~. InatMitiontnthedifficulty ofidenti?r~~~ingupcnwhatservices~dbecategorizedas %ssmtial" b-3 d&agree with this Ation for the follcwing -. First,thepmposal'mldrqui.rethatScHsta~beomf~cmany nuralhospitalthatisthesolescxlrceofan~serviceregardless ofit.spmxjmi~tootherhoqitals. mati.s,ulfiartheprqasal,three nnalhoepitals,within5milesofeacfiother,~dallqualifyasS~ ifeachofferedangsential-icethatthe~two~dnot. Wedo mtbelievethatanyoneofthesehc6pitalstmlyrqnsmtsthesole samz of Caremasonably available inits cxmmmityregardless of any unigueservicesitprwides. Nodmbt,ifoneofthethreehcspitalsi.n the~~clmed,thel~essentialsenrice~dbeaddedbyeitheror bothofthe-~hospitalsifthereisasuffici~.marketinthe cxxmnmiq forthe service. L Page70 GAO/HRB9067RuralHospit& Appendix V CommentsFromtheDepartmentofHealth andHnmanSwviras o On Mar& 10, 1986, we issued proposed regulaticols to allow an adjW to thehcspital specific portion of the paynwIt for sots that~i~asignificant~distcationbecauseofnew -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 hospital-forMedicarebeneficiariesresi~inrural-. 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. Additi~ly,thereportbroadlycategorizestheprcblenrsfaaedbyrvral 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-. lhesecausesincludelcwvolume(dueinparttotheinabilitytorecruit specialists)andhi~fixedcmtsperQse(duetolowVOl~). Table3.1 Now on p. 21. cnpage 30, therefore, dces rnt acoxatslyportmytbe potential iqxct of the identified Federal initiatives. TherqortnotestheexistenceoftbenawFssentialAocess~ty 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 cwrerhlydevelopingp~guidalinessothatthsprogramcanbs inplementedwhen approlniations are available. lbs legislation authorized theprCqraminUptose~enStates,andH~willberequiredtodevelop criteria for selsctirgtbese states. IndevelqCrqthscritsriausedto selectStatesandawardgrantstnindiviAalhcspitals,special 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,' iIyA.LL--/ Richard P. Kusserow Inspector General Enclosure 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 Initiatives --- 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 Chapter5 Conclusions,Recommendations, Matter for CongressionalConsideration,and AgencyComments 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 designation. 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 contributions. 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. 2SysteMetrics/McGraw-Hill, SmallIsolatedRuralHospitals:AlternativeCriteriafor Identificationin Comparison WithCurrentSoleCommunityHospitals,FinalReportto ProPAC, 1988,page56. Page64 GAO/HRD96-67 RuralHospitals 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 task.” 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. Consideration 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. 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 systems. 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 Laundrv -._- 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 contracts. 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 trends. 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. Hospitals 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 operations. 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 organizations. 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 chapter3 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. Attention 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 Medicareexpenditures 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 from6Oto50percent. 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 1985.87. “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 financialproblems. 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 “Datasetincludes271SCHsdexgnatedduring198387. 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. GAO/HRD-90-67RuralHospitak 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, mdicatingcontinuingfinancialdntrrss. ‘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 financially. 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 patients. 2111inois FarmBureau,HealthCarein RuralIllinois,1989,p. 46,andCommunityHealthServices Development Project,unpublisheddatafrom18rural communitysurveysconductedbetween1986 and1990. “Wedefineddistressedrural hospitalsasthosewith a 3-yearaveragetotal marginin thebottom26 percentileof rural hospitalswith fewerthan 100beds. Page16 GAO/IJRE-W7 Rural Hospitala Chapter 1 Introduction 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 Introduction 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 warranted. 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 (CEOS). 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 (N=392).” 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 RuralHospitals Chapter 1 Introduction 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 Available Figure 4.1: Physician Recruitment Poster 43 Abbreviations 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 Contents Executive Summary 2 Chapter 1 Introduction Background Objectives, Scope, and Methodology Chapter 2 Constraints and Low Patient Volume Raises Costs, Leads to Financial Distress 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 Administrators 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 Efforts 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 Hospitals 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 services. 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
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)