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Rural Hospital Flexibility Program Tracking Project
Appendix 1
Literature Review
PREVIOUS EXPERIENCE WITH LIMITED LICENSURE HOSPITALS
The broad agenda of the Rural Hospital Flexibility Program (RHFP) is to
strengthen rural health care systems built around financially viable small
hospitals that provide high-quality community-oriented care.
At the core of the program, the Critical Access Hospital (CAH)
model is the most recent addition to numerous Medicare-oriented policy
initiatives that have sought to stabilize small-town America’s
hospitals. Initial experience
with the RHFP and the CAH model is influenced by the policy environment in
which this initiative is being implemented.
We thus first briefly review trends in Medicare reimbursement
policy and the financial conditions of rural hospitals, describe the
antecedents to the RHFP/CAH program, and summarize the lessons learned
from the previous experiments.
The Ups and Downs of Rural Hospital Finances
Small communities in rural America have long struggled to maintain their
health care resources in the face of increasing competition, accelerating
capital and technical requirements, a dwindling population base, lagging
economic growth, and disproportionate rates of uninsurance.
(For recent reviews of the large literature on rural hospitals see
Ricketts and Heaphy, 1999; American Hospital Association, 1997; Succi MJ,
Lee SYD, and Alexander JA, 1997.) More
than their urban counterparts, rural hospitals have, since 1983, been
riding a roller coaster whose ups and downs have been driven largely by
shifts in Medicare payment policy. Uniquely
dependent on Medicare revenue, changes in payment policy have proven to
have a generally amplified effect on their financial fortunes. Three
phases of decline, improvement and decline are illustrated in Figure
1 and discussed below. In
this discussion, “Medicare inpatient margin” refers to the percentage
ratio of total payments for Medicare inpatient stays to total costs of
care. “Total Margin”
denotes the ratio of total patient care revenue for all payers and
services to total operating costs net of gifts and public subsidies.
The latter is an indicator of the overall financial status of a
hospital. The data for these
calculations are drawn from Medicare cost reports and the dates refer to
the Prospective Payment System (PPS) reporting year, which differs among
individual hospitals.
Post-PPS
Decline. The underlying stresses combined with the 1983
introduction of Medicare’s inpatient prospective payment system (DRGs)
conspired to severely undermine the general financial viability of rural
facilities. Non-metropolitan
hospitals as a group lost money on their Medicare inpatients for the first
10 years of the program (ProPAC, 1995; MedPAC, 2000).
Almost 40 percent experienced three or more consecutive years of
negative Medicare inpatient margins (the ratio of revenue to allocated
costs) (Pro PAC, 1990). Nowhere was the problem more acute than among the
almost 1,200 non-metropolitan hospitals with fewer than 50 beds, and one
consequence of the financial stress was a rising tide of small rural
hospital closures. The actual number is uncertain because of the reopening of
some facilities (General Accounting Office, 1991; Harmata and Bogue,
1997). One careful study
identified over 132 permanent closures by 1988, over 30 percent of which
were more than 25 miles from their nearest alternative (Hart et al.,
1990). Closure is the most dramatic outcome. A more common result of fiscal stress is the slow
strangulation of the ability to provide high quality needed services
(Office of Technology Assessment, 1990; Ermann, 1990; Moscovice and
Rosenblatt 1985).
Recovery
with PPS Policy Changes. In
response to the disproportionate stress of small rural facilities,
Medicare policy first sought to shield protected categories such as Rural
Referral Hospitals, Sole Community Hospitals, and Medicare Dependent
Hospitals (Komisar, 1991; Office of Technology Assessment, 1990; ProPAC,
1994). The PPS payment
methodology was then modified, most notably by removing the rural-urban
differential in the standardized payment rate.
Most important, among all hospitals Medicare payment increases were
brought in line with, and after 1992 exceeded, the growth in costs per
case. As a result, during the
mid-1990’s the financial status of most rural hospitals steadily
improved and the pace of closures dramatically fell, falling to less than
10 in 1992 (Sinay, 1998). Among
rural facilities with less than 50 beds, the average Medicare inpatient
margin finally turned positive in 1995 and by 1997 was a healthy 7.9
percent, but far below the national average of 17 percent (MedPAC, 2000b).
However, Medicare PPS covers inpatient acute care, which amounts to
only one-third of its total Medicare payments to hospitals (MedPAC, 1999).
Total operating margins on all patient care are much lower, an
average of a mere 2.4 percent above costs for small rural hospitals in
1997. The negative margins
among some thirty percent of such hospitals in that year still created
significant stresses and a continuing issue of vulnerability (MedPAC,
1999).
Post-BBA
Decline.
The generally improved financial picture of the 1990s did
not last. The healthy overall
Medicare margins for hospitals, nursing homes and home health agencies
attracted congressional attention and resulted in significant payment
reductions as mandated by the 1997 Balanced Budget Act (BBA). In the following year, 1998, the Medicare inpatient payment
update factor for all hospitals was set to zero and payments per inpatient
case actually declined (MedPAC, 2000b).
Rural hospitals, which are
notably dependent on Medicare payments, saw their Medicare inpatient
margins drop immediately and almost in half from 9.5 in 1997 to 5.2
percent in 1998 (compared to a decline from 18.1 to 15.8 percent for urban
facilities). This decline in
inpatient net revenue was most notable among larger rural hospitals.
However, those small hospitals that had aggressively diversified
into home health, long-term care, and rural health clinics were uniquely
vulnerable to the BBA provisions and experienced even greater cuts in
Medicare revenue (Franco, 1999; Mohr and Blanchfield, 1998).
The mandated reductions for different services were piled one upon
another. As a result, the
average total operating margin for rural hospitals with less than 50 beds
dropped in one year (1998) from 2.4 to a mere 0.4 percent, with 44.4
percent of facilities reporting negative overall margins.
These dramatic first-year
Post-BBA reductions were generally thought to be only a portent of what
was to come since the sharpest mandated cuts were loaded toward the end of
a five-year implementation period. Most
significant for small hospitals, was the projected introduction of a
Medicare prospective payment system for outpatient department (OPD)
services. Every projection,
including HCFA’s own simulations, foresaw escalating future cuts rising
to an average of 20 percent in 2002 in Medicare OPD payments to small
rural hospitals (The Lewin Group, 1999). Given their primary function as centers of ambulatory, not
acute inpatient care, most small rural hospitals were looking at a
significant threat to their financial viability.
One widely quoted analysis projected that as a result of the BBA
cuts the average total margin for small rural hospitals would in five
years fall to a unsustainable negative 5.6 percent (HCIA, 1999).
The relief from this
scenario, enacted in the November, 1999 Balanced Budget Refinement Act
(BBRA), did not undo the reductions to date, but essentially postponed for
up to five years the application to small rural hospitals of many of the
future scheduled reductions (MedPAC, 2000a; Mueller, 1999).
A recent analysis of a large sample of hospitals concludes that for
small hospitals with less than 100 beds, both Medicare and total facility
margins are continuing to fall through the year 2000 and will then
stabilize at very low levels (HCIA-Sachs, 2000).
These projections indicate continuous severe financial pressure for
over 40 percent of small rural facilities.
In sum, the RHFP/CAH
program was enacted in the best year the average rural hospital’s
finances had seen since 1980. However,
accompanying the new program was a series of permanent Medicare payment
reforms that sharply reduced the financial status of most small rural
hospitals. The CAH model was
thus by design or by default structured as a “just-in-time” safety
net. The BBRA has left
hospitals financially weaker but for many removed the sense of an imminent
disaster. For many hospitals,
the future economic advantages of CAH conversion will also depend on their
expectations of how temporary the BBRA respite will prove to be.
Development of Limited Licensure Hospital Models
The Critical Access Hospital model, directed at stabilizing small rural
facilities, is an outgrowth of previous experiments with limited licensure
hospitals. These models arose
in response to both chronic difficulties recruiting physician staff and
the increasing financial pressure such hospitals were experiencing after
1983. Some communities
responded to these pressures by radically restructuring and downsizing
their size and service capacities (Alexander, D’Unno, and Succi, 1996). In addition to these individual efforts, public policy began
to consider a different form of health care institution, one better
adapted to rural environments, that might better serve residents in
communities where full-service hospitals are no longer viable.
The strategy behind this concept has been to allow small facilities
to shift their licensure status to a downscaled, simpler organization that
offers core services and is given some flexibility in regulatory
requirements (Christianson et al., 1990; Agency for Health Care Policy and
Research, 1991; Helms, Campion, and Moscovice, 1991).
Consideration of an
alternative rural hospital model dates back almost 30 years (Arthur D.
Little Inc., 1974). Actual
experimental models along these lines emerged in different forms. Colorado
created legal status for what were essentially infirmaries with beds
needed by seasonal tourist facilities and colleges. California created an “Alternative Rural Hospital Model”
(ARHM); Florida an “Emergency Care Hospital” (Alpha Center, 1991;
Helms, Champion, and Moscovice, 1991; Gibbens and Ludtke, 1989).
A single facility in North Carolina (“Our Community Hospital”
in Scotland Neck) became a prototype of a small-scale hospital with a
mission of anchoring primary care with a limited inpatient capacity and a
supportive network with a larger hospital
(Kushner, Bernstein, and Dihoff, 1992).
States such as New York also introduced planning efforts to
rationalize the scope of services and prevent costly duplication in
different rural hospitals (Gibbens and Ludke, 1989).
Over the same period there was also a series of experiments to
strengthen rural hospitals by linking them together in supportive networks
and consortia (Kovner, 1989; Moscovice et al., 1991; Moscovice et al.,
1995; Casey, 1995; Moscovice, Wellever, and Christianson, 1997).
The two principal experimental
progenitors to the RHFP/CAH program were introduced in the early
1990s—Montana’s Medical Assistance Facility demonstration and HCFA’s
Essential Access Community Hospital-Rural Primary Care Hospital
(EACH-RPCH) program implemented in seven states.
Nationwide, there were 372 rural community hospitals with less than
20 beds, 122 of which were experiencing unsustainable losses (Christianson
et al., 1993). Thus, although
the plight of small hospitals was dramatic, the size of a limited
licensure program was not expected to be large.
Although similar, the two models had important differences that are
summarized in Table 1, which is drawn from a previous analysis (Wright,
Wellever, and Felt, 1994).
Montana’s Medical Assistance Facility
Demonstration
The first real test of a
government-recognized alternative rural hospital model came with
Montana’s Medical Assistance Facility (MAF) demonstration.
Created by the Montana legislature in early 1987, the MAF was the
first limited-licensure hospital model established by law.
(Descriptions and a history of the program are available from
Wellever, 1989; Wellever and McCarty, 1989; Office of Inspector General,
1993; Wright et al., 1995; Gaumer et al., 1993).
The MAF program originally responded to the threatened closure of
very small, isolated rural hospitals in the eastern part of the state.
Subsequent to the legislation, the Montana Hospital Research and
Education Foundation (MHREF), associated with the Montana Hospital
Association, proposed a demonstration of the model to HCFA which included
a small annual grant for technical assistance and, more importantly,
required waivers of Medicare hospital conditions of participation and a
shift to a simple cost-based payment methodology.
After years of negotiation, the waivers were finally granted in
December 1990, and shortly afterwards the first MAF was licensed.
Congress extended the waivers in 1993 through 1997, after which the
demonstration was folded into the RHFP/CAH program.
As summarized in Table 1, the
only required limitation for MAFs was a maximum length of stay of 96
hours. MAFs were required to
maintain 24-hour emergency room capacity and minimum clinical laboratory
and pharmaceutical services. Converting
facilities were, however, required to staff an RN for only 8 hours a day,
permitted to operate with only a mid-level practitioner on site, and to
cover their emergency rooms with RNs on call within 20 minutes.
MAFs were subject to considerable oversight.
The peer review organization (PRO) exercised concurrent review of
all inpatient admissions; MAFs were relicensed annually.
But there were minimal requirements for local planning or for
supportive networks with larger hospitals.
Each applicant for MAF status had to obtain a certificate of need
from the state and be approved by HCFA, the Office of Management and
Budget. There were no
hospital-level grants or supportive funds other than the approximate
$100,000 a year annual grant for outreach and technical assistance to
MHREF. Some 40 hospitals in
Montana met the “frontier hospital” eligibility criteria.
Through 1997, 12 actually converted their licenses.
HCFA’s EACH-RPCH Program
As the MAF program was being
developed in Montana, provisions of the Omnibus Budget Reconciliation Act
or 1989 authorized the creation of the EACH-RPCH program. (Program
descriptions are available from Wright et al., 1995; Campion and Dickey,
1995; Campion, Helms, and Barrand, 1993; Weisgrau, 1995.)
Seven states (California, Colorado, Kansas, Nebraska, New York,
North Carolina, South Dakota) successfully bid to participate in this
experiment, which was a federal, not a state initiative, and better funded
than the MAF demonstration. The
EACH-RPCH program consisted of three main components: (1) a
Medicare-certified limited licensure rural hospital model (RPCH); (2) a
formal network to a larger non-urban support hospital (EACH); and (3) a
grant program that supported state-level implementation and technical
assistance efforts. The first
grant awards were made to states and hospitals in September 1991, and the
proposed rules published one month later.
Implementation of the program was hampered by debate and
uncertainty over the final rules, which were not published until May 1993.
The first RPCH was certified in August 1993.
The grantee states continued to lobby for a series of technical
amendments, which were not passed by Congress until October 1994.
As summarized in
Table 1, RPCHs were restricted to a maximum of 6 beds plus 6 additional
swing beds and maximum lengths of stay of 72 hours (extended to a facility
average of 72 hours in 1994). It
was assumed (and ultimately required) that RPCHs would offer neither
obstetrics nor inpatient surgery. As
with the MAFs, RPCHs were required to offer 24-hour emergency care that
could be met with an on-call nurse within 30 minutes and could be staffed
with a physician assistant or nurse practitioner without a physician
physically on site. Medicare
payment methodology for RPCHs was shifted to a cost-based per diem for
inpatient stays and an all-inclusive rate combining professional and
facility service components. Unlike
the MAF program, individual hospitals could apply for planning and
implementation grants totaling up to $200,000.
As implemented in most states, the planning process was to support
substantial efforts at developing networks and restructuring
community-level health care. Through
FY 1994 there were 59 potential RPCH grantees (together with 36 potential
EACHs) that received grants for a total of $21.7 million.
By the end of 1997, 36 facilities actually converted to RPCH
status.
Lessons from the Past: Successes and Challenges
Several evaluations of the MAF and EACH-RPCH programs draw lessons from
the experience of these two experimental efforts.
(Conclusions here are generally drawn from Wright et al. 1995;
Gaumer et al. 1995; Campion and Dickey 1995., with other specific
references noted.) Participants
in both programs complained that delays and rigidities in federal
regulations undermined and slowed their implementation efforts.
As might be expected, the first RPCHs to be surveyed for their new
licensure and Medicare status encountered further delays and unexpected
difficulties (Hilsenrath, Chien, and Rohrer, 1991; Lutz, 1992).
In addition to these start-up woes, the pioneer states and
hospitals reported the following:
-
There
is No Evidence that Limited-Licensure Models Reduce the Quality of
Care. The new
models raised some quality-of-care questions (Wingert, Christianson,
and Moscovice, 1991). In
Montana, PRO concurrent review uncovered no unusual quality issues.
The PRO did have to adjust to the higher acuity of patients
when a large hospital with two physicians on staff converted.
Among RPCHs, site-visits found that quality assurance systems
had generally been strengthened.
None of the participating states identified quality of care
concerns in the early phases of the project.
-
The
Financial Viability of Limited Licensure Hospitals Usually Improved.
The cost-based Medicare reimbursement initially
strengthened both Montana’s MAFs and the RPCHs
(Wright et al., 1995). This
stands in contrast to the experience of other small hospitals that
attempted to downsize their operations, but without predictable
economic benefit (Mick and Wise, 1996). Over time, the advantages were retained and none of the
converted hospitals closed (Weisgrau and Wendling, 1999). However, there are limits to the financial benefits.
Cost-based reimbursement was offered only by Medicare (and in
some states Medicaid) and the cost basis did not include all facility
expenditures. Three of
the 12 hospitals analyzed by the General Accounting Office (GAO) lost
money on inpatient care due to the conversion (GAO, 1998). Importantly, the real financial advantage among the Kansas
RPCHs has proven to be in the outpatient and ancillary services
departments (personal communication from Sheldon Weisgrau, 2000).
Nevertheless, among MAFs with five or more years of experience,
the two that had the most significant weaknesses remain today in
precarious financial shape (personal communication from Kip Smith and
Denzel Davis, 2000).
-
Not
Every Small Hospital Would Financially Benefit from Conversion. Financial feasibility studies for the EACH-RPCH
program identified numerous instances where hospitals were projected
to suffer financial loss from conversion (Wendling,
1993). In general, those that were projected to benefit the most
were those that had to make the fewest changes.
This observation was supported by a case study of an RPCH that
abandoned inpatient care altogether to function as a freestanding
emergency room (ER) and did not do well financially (Avery, 1999).
High-cost-per-case facilities are more likely to do well under
cost reimbursement than low-cost facilities.
-
State-Level
Implementation Generally Went Smoothly.
While there was initial concern that states would find the
process of introducing a new licensure status complex, in general this
was not the case. Among
EACH-RPCH states, only New York required actual legislation.
However, there can be important conflicts with existing
regulations. For example,
California MediCal payments for long term care required a hospital
status incompatible with the RPCH model.
The economic implications of conversion were such that no
California hospital converted (Felt and Wright, 1993).
In general, state-level policy has been shown to affect how
small rural hospitals have attempted to restructure themselves
(Alexander and Succi, 1996).
-
Length
of Stay Limitations Were a Significant Barrier to Participation.
Physicians strongly objected to the 72-hour limit to
inpatient stays for RPCHs. MAFs
operated smoothly under a 96-hour limit, but thought that a 72-hour
limit would be very restrictive.
In addition, MAFs had swing beds available as a safety valve.
Among early converting RPCHs, swing bed use did initially
increase dramatically (GAO, 1998). Swing beds were also useful in meeting the strict RPCH limits
on the number of inpatient beds, but were of limited use in states
with strict certificate of need (CON) regulations covering long-term
care. Some observers and
many facility administrators thought that a more clinically-relevant
limitation such as a core set of permissible DRGs would be more
appropriate than arbitrary limits on length of stay (Wellever, 1991;
Wellever, Moscovice, and Chen, 1993; Moscovice et al., 1993).
-
Hard
Work for Diffuse Benefits from Network Development.
The Montana MAF model required only transfer and referral
protocols with a larger hospital.
Many RPCHs with more formal agreements with their supporting
EACHs had functionally the same relationships as in Montana.
However, the EACH-RPCH program did generate several outstanding
examples of close supportive linkages between RPCHs and EACHs and of
cooperative multi-hospital networks (Campion, Lipson, and Elliot,
1993; Alpha Center, 1994). States
such as Kansas and West Virginia put great emphasis on community
involvement and a planning process (Rosenberg and Associates, 1993;
Rosenberg, 1991; Wellever et al., 1994).
It was, however, difficult to value the benefits from network
development, an activity that was a focus of a large share of program
development grants.
-
Hospital/Community
Decision-Making Takes Time and Support.
Outside of the
experiments, hospitals and their communities under great stress have
been shown to make poor decisions when suddenly confronting an
unsustainable future (Harmata and Bogue, 1997).
In general, state policy and legislation is an important
determinant of the ability to convert a failing hospitals to a viable
alternative role, and the MAF and EACH-RPCH programs were important
examples of a supportive environment (Alexander and Succi, 1996).
However, the states implementing the MAF and EACH-RPCH programs
reported that it takes, in some cases, literally years for a community
and its hospital to decide on a conversion (Campion, Elliot, and
Dickey, 1993; Shreffler et al., 1999).
-
Few
Radical Changes Among Limited Service Hospitals.
The EACH-RPCH program generally sought to discourage the
oversupply of rural hospital beds, the development of rural-centric
networks, and a creative process of community-oriented planning to
rethink and strengthen rural care.
There were some outstanding instances of radical downsizing and
restructuring of hospitals, particularly in eastern states with
generally larger and more closely spaced hospitals.
One MAF facility took the opportunity to restructure and
rebuild its hospital and nursing home.
Nevertheless, most hospitals’ primary motivation was finding
a solution to dire economic straits (Sheffler et al., 1999; Succi et
al., 1996). Hospitals’
instincts to make as few disruptive changes as possible were supported
by financial incentives. Financial
feasibility studies showed that hospitals that had to make the fewest
changes tended to be those realizing the greatest advantage (Wendling,
1993). According to the
GAO, the West Virginia Hospital that significantly downsized lost over
$200,000 a year in Medicare inpatient revenue as a result of
conversion (GAO, 1998).
-
The
MAF Demonstration Cost Medicare Far Less than the EACH-RPCH Program. An
analysis by the GAO of 12 RPCHs in 4 states found that, on average,
inpatient care cost Medicare an additional $30,402 per hospital (GAO,
1998). This small amount
was balanced by much larger (but unmeasured) increases for ambulatory
services. The big cost
factor to the program was not the RPCHs but the effect of shifting
much larger EACHs to Sole Community Hospital status for payment
purposes. The annual
payments to the first EACH in South Dakota cost Medicare close to $3
million a year (Wright et al., 1995).
Summary and Conclusions
The new RHFP/CAH program drew on this initial experience by combining
elements of both programs, while structuring in a level of state-to-state
flexibility in key program parameters that was absent from the EACH-RPCH
experience. More importantly,
the initial experiments were implemented in a handful of states that could
reflect only a portion of the diversity of rural conditions and public
policy environments across the nation. Policy debates about a nationwide
expansion of the earlier programs examined different options for combining
the initial experiments (Campion, 1995; Wright, Felt, and Wellever, 1995).
However, these policy documents did not prefigure the RHFP’s
emphasis on state-to-state variations in eligibility criteria, program
goals, and implementation strategies.
In addition, the economic environment for rural facilities is now
moving in a different direction than that experienced during the
implementation of the MAF and EACH-RPCH experiments.
The evaluation of the new national program will not only draw upon
the lessons learned from past experience, but also address new issues from
a more flexible program in a different environment.
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