Chapter 1: Introduction

Rural Hospital Flexibility Program Tracking Project

Chapter 1
Introduction

Amy Hagopian, M.H.A.
L. Gary Hart, Ph.D.
WWAMI, University of Washington

The U.S. Congress made an important decision to invest significantly in America's rural hospitals through the Rural Hospital Flexibility Program (RHFP) in 1997, which includes the Critical Access Hospital (CAH) program. The Federal Office of Rural Health Policy (FORHP) is the implementating agency, and has contracted with its Rural Health Research Centers and the Rural Policy Research Institute to track the program and document its successes and opportunities for improvement. The FORHP is also working in close partnership with state offices of rural health (ORH) and related state-based entities to ensure the success of the program.

The goal of the Rural Hospital Flexibility Program Tracking Project (“Tracking Project”) is to maximize the effectiveness of the RHFP by tracking and reporting implementation successes and barriers. The Tracking Project is being conducted by a Consortium of five rural health research centers, previously designated by the FORHP. The five centers are based at the University of North Carolina, the University of Southern Maine, the University of Minnesota, the Project HOPE Walsh Center for Rural Health Analysis, and the University of Washington. In addition to these five centers, the Rural Policy Research Institute at the University of Missouri is part of the Consortium and plays the role of disseminating findings and posting the web site (see Chapter 2 for more about dissemination).

During this first year of the Tracking Project, the research centers visited 12 states and 24 CAHs. The research centers at Southern Maine, North Carolina, Minnesota and Washington conducted an equal number of these visits (three states and six hospitals each). Project Hope accompanied site visitors in five states for purposes of tracking emergency medical services (EMS) system changes attributable to this program. See Appendix 2 for a list of sites visited and a description of the site selection methodology.

The Center at the University of Washington provides coordination for the Tracking Project. Conference calls among the centers are held regularly (see Appendix 4 for a log of conference calls).

The Tracking Project’s objectives are to:

Provide a continuous stream of information to the FORHP and the states.
Conduct surveillance sufficient to allow early adjustments to optimize program performance.
Disseminate good practices, policies and ideas.
Produce an annual assessment document.

One of the strengths of the RHFP is the provision of resources and a vision at the federal level, with implementation provided through partnerships at the state and local levels. One of the resulting issues, however, is the variety of interpretations of what that federal vision is, and the consequent variety of implementation strategies and policies at state levels. One of the purposes of the Tracking Project is to allow the FORHP to learn from the states about what works well in implementing the RHFP locally.

Small communities in rural America have long struggled to keep doors open in the face of competition for market share among the mobile portion of the population, accelerating capital and technical requirements, a dwindling population base, lagging economic growth, disproportionate rates of uninsurance and poor insurance, health professional shortages, and changing federal reimbursement policies.

Rural hospitals have, since 1983, been riding a financial roller coaster whose ups and downs have been driven largely by shifts in Medicare payment policy. Because rural hospitals are uniquely dependent on Medicare revenue, changes in that program’s payment policies have had a strong influence on rural financial fortunes. There have been three cycles of decline, improvement and decline: the inpatient prospective payment system (PPS) led to the first decline, followed by improvements as a result of organized rural advocacy across the nation and at state and local levels, and then declines again after the Balanced Budget Act (BBA) of 1997. This history is detailed in our literature review in Appendix 1.

Although first-year (1997) BBA reductions were dramatic, they are thought to be only a hint at future reductions, since the sharpest cuts are to come at the end of the five-year implementation. For small hospitals, the Medicare prospective payment system for outpatient services is the most threatening change on the horizon because of their relatively large volume of outpatient services and the size of reimbursement cuts. Every estimate, including the Health Care Financing Administration’s (HCFA’s) own, project outpatient payment cuts totaling 20 percent by 2002 for small rural hospitals (The Lewin Group, 1999). One widely quoted analysis projected that as a result of the BBA cuts, the average total margin for small rural hospitals would fall to a unsustainable negative 5.6 percent (HCIA, 1999) in five years.

The relief from this scenario—the November 1999 Balanced Budget Refinement Act (BBRA)—did not reverse the reductions to date, but essentially postponed their application to small rural hospitals (MedPAC, 2000a; Mueller, 1999). An 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 ultimately stabilize at very low levels (HCIA-Sachs, 2000).

In sum, the RHFP was enacted in the best year the average rural hospital’s finances had seen since 1980 (see Appendix 1). However, accompanying the new program was a series of permanent Medicare payment reforms that sharply reduced the financial status of most small rural hospitals. Thus, the CAH model was by design or by default structured as a “just-in-time” safety net. The BBRA will leave hospitals financially weaker but for many removed the sense of an imminent disaster. For many hospitals, consideration of CAH conversion may depend on their expectations of how temporary the BBRA respite will prove to be.

The CAH model is an outgrowth of previous experiments with limited licensure hospitals. The new RHFP drew on those experiments by combining the best elements of them, while allowing states significant flexibility in key program parameters (broad state interpretation was absent from the Essential Access Community Hospital-Rural Primary Care Hospital [EACH-RPCH] experience). These experiments are described in detail in our background review in Appendix 1. Evaluations of the limited-licensure programs assured Congress and rural health advocates within government that quality care would not be compromised by the new licensure model, that financial viability was generally improved, that states could handle the implementation challenges, and that the program would not be a financial burden for the Medicare program. However, conversion was not advisable for all small rural hospitals, and the length of stay requirements were a barrier to entry to all but those targeted to benefit by the program. The benefits of network affiliation were unclear, so the RHFP was not specific about what the requirement there would be, as well.

Provisions of the RHFP program include:

CAH is available in any state (except Rhode Island and New Jersey) that chooses to set up such a program and provide HCFA with the necessary assurances.
To be designated as a CAH, a facility must be located in a state that has an approved rural health plan, and must be located more than a 35-mile drive from any other hospital or CAH (in mountainous terrain or in areas with only secondary roads available, the mileage criterion is 15 miles), or is certified by the state as being a necessary provider of health care services to residents in the area.
The CAH’s average length of stay must be 96 hours or less (it was originally set at 96 hours per case by the BBA, but the BBRA revised it to an average 96 hours).
The bed-size limit for CAHs is 15 beds, with an exception for swing-bed facilities, which may have up to 25 inpatient beds that can be used interchangeably for acute or Skilled Nursing Facility (SNF)-level care. Not more than 15 beds can be used at any one time for acute care.
A rural health network must be established. A rural health network is defined as an organization consisting of at least one CAH and at least one full-service hospital, the members of which have entered into certain agreements regarding patient referral and transfer, communications, and patient transportation.
Each CAH that is a network member is required to have entered into the agreements discussed above. In addition, each CAH in a network must have an agreement for credentialing and quality assurance with at least one hospital that is a member of the network, or with a Peer Review Organization (PRO) or equivalent entity, or with another appropriate and qualified entity identified in the rural health care plan for the state.

The CAH program has the potential to increase hospital margins by:

1. Increasing Medicare inpatient reimbursement to allowable cost levels.

2. Insulating the hospital from the impact of the new Outpatient Prospective Payment System (OPPS) (although most rural hospitals have a temporary reprieve from OPPS).

3. Decreasing the effect of health care costs that outpace reimbursement.

However, as we emphasize throughout this report, the RHFP is much more than the CAH program. Besides converting hospitals to CAH status, the program focuses on:

Establishing rural health plans for participating states.
Improving quality of care.
Developing rural health networks.
Improving emergency medical services in CAH service areas.
Encouraging rural hospitals to engage in community development.

This document describes the RHFP’s first-year experience. In particular, we have focused on the:

Conversion experience in states (role of state agencies and organizations).
Role of state agencies and organizations in RHFP’s implementation.
Experience of hospitals converting to CAH status.
Financial experience of participating hospitals.
Emergency medical services initiatives tackled at state and local levels.

Chapter 2: Dissemination of Rural Hospital Flexibility Program Tracking Project Findings (RUPRI)

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Last modified: 05/07/08