21% of Rural Hospitals at High Financial Risk of Closing

February 20, 2019 - A new analysis from consulting firm Navigant revealed that one-in-five rural hospitals is at high risk of closing based on their current financial position.

The analysis of publicly available data explored the financial viability and community essentiality of over 2,000 rural hospitals across the country. And researchers found troubling results, including the fact that 430 hospitals across 43 states are on the verge of closing based on their total operating margins, days cash on hand, and debt-to-capitalization ratios.

The at-risk rural hospitals represent more than 21,500 staffed beds, 707,000 annual discharges, and about $21.2 billion in total patient revenue.

Furthermore, approximately 64 percent of the at-risk rural hospitals are considered essential to the health and economic well-being of their communities, the analysis uncovered. That means the 277 at-risk rural hospitals have trauma status, deliver services to vulnerable populations, and/or are geographically isolated.

The rural hospitals also employ about 150,000 people in their communities, meaning the hospital closure could significantly impact the local economy.

READ MORE: Overcoming Rural Hospital Revenue Cycle Management Challenges

Researchers pointed out that rural hospital closures will impact southern and midwestern states the most. Mississippi, Alabama, Kansas, Georgia, and Minnesota are slated to feel the most impact, with over five rural hospitals at high financial risk of closing.

However, researchers project rural hospital closures to affect the entire country. A total of 34 states have five or more rural hospitals at risk of closing, including Washington and Maine.

“Our analysis shines a new light on a rural hospital crisis that must be addressed and could significantly worsen with any downturn in the economy,” co-author David Mosley, Managing Director at Navigant, stated in a press release. “Local, state, and federal politicians, as well as health system administrators, need to act.”

Researchers partially attributed the elevated risk of rural hospital closures to low rural population growth. But payer mix degradation is also to blame, the analysis stated.

“A loss of agricultural and manufacturing jobs has led to a corresponding degradation of the payer mix,” wrote Mosley et al. “Residents who remain in rural communities tend to be either very old or very young, and these communities often have higher rates of uninsured, Medicaid, and Medicare patients, leading to more uncompensated and under-compensated care.”

READ MORE: How a Rural Hospital Used Health IT, EHR to Stay Independent

“Medicare payment reductions are also a major factor, with the average rural hospital counting on Medicare for 46 percent of gross patient revenue.”

Declining inpatient care volumes are also driving excess capacity, resulting in high financial risk.

“Many rural hospitals were originally built in the post-World War II era to provide a level and volume of care that is no longer needed,” the authors explained. “This factor, combined with the ascendance of managed care and an increased focus on outpatient services, has left many rural hospitals overstaffed and underused. According to research, the average rural hospital has 50 beds and 321 employees, but a daily census of just seven patients.”

Further reductions in inpatient utilization is likely to lead to rural hospital closures. The Government Accountability Office (GAO) recently reported that declines in inpatient use resulted in 64 rural hospital closures between 2013 and 2017, more than double the number of closures in the previous five-year period.

Finally, the lack of capital to invest in innovative technology is putting rural hospitals at financial risk. It comes as no surprise that rural hospitals struggle to acquire the capital needed to invest in infrastructure improvements compared to their urban counterparts.

READ MORE: When Should Providers Consider a Strategic Hospital Acquisition?

As rural hospitals continue to struggle, the gap between urban and rural providers will continue to grow, especially as investments allow urban hospitals to implement value-based care.

However, the authors of the Navigant analysis offered several solutions for rural hospitals.

First, policymakers should advance legislation around telehealth reimbursement, as well as bipartisan bills like the Rural Emergency Acute Care Hospital (REACH) Act. Senators Chuck Grassley (R-IA), Amy Klobuchar (D-MN), and Cory Gardner (R-CO) reintroduced the REACH Act in 2017, calling for a new Medicare classification under which rural hospitals would be able to provide emergency and outpatient services without having inpatient beds.

“Many rural hospitals are designated as critical access hospitals, meaning they are required to provide a certain number of inpatient beds along with an emergency room. Those requirements often force hospitals that could still be turned around to close instead,” the authors wrote.

“The REACH Act offers them another option: to resize and stabilize. Under a new classification known as the Rural Emergency Hospital, these hospitals would be able to rid themselves of the excess inpatient beds. Instead, they would have to maintain enough operational flexibility to move patients to larger hospitals — academic health systems in particular — while focusing on outpatient services.”

The American Hospital Association (AHA) recently backed a similar Medicare designation as part of their 2019 rural advocacy agenda.

Second, authors of the analysis also advised rural hospitals to collaborate with tertiary and academic health systems to stay afloat financially. The partnerships allow rural hospitals to leverage the resources and capabilities of more stable organizations.

“For example, EHR provisioning allows hospitals with EHR technical and operational acumen to extend their capabilities to community/rural facilities hard-pressed to afford and operate a top-shelf HER,” the authors stated. “In addition, extension of tertiary/academic specialty clinical programs can help develop a hub-and-spoke network of clinical care that augments rural hospital services. This leverages regional/academic specialty expertise while allowing care to remain local at rural partner facilities.”

The CEO of America’s Essential Hospitals, a trade group that advocates for vulnerable hospitals, supported the recommendations.

“Ensuring rural access demands that we embrace collaboration and technology,” Bruce Siegel MD, MPH, stated in the press release. “Telehealth and partnerships between rural hospitals and tertiary centers will be key to ensuring the right care is delivered at the right time."