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Rural Hospital Flexibility Program Tracking Project

Chapter 8
Conclusions and Unexpected Findings

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

The pace of implementation of this two and a half year-old program has been dramatic.  Some characteristics of Critical Access Hospitals (CAHs) and Rural Hospital Flexibility Program (RHFP) participation include the following:

• Forty-eight states got start-up funds to participate in the RHFP.  Forty-three states submitted proposals for first-year grants to implement the program, and received funds.  Another 37 states have sought and received HCFA approval to participate in the CAH program, and two more states are awaiting approval.  Since two states are not eligible, that leaves only nine states that are not yet participating.

• One hundred seventy hospitals have been designated CAHs (though more than half are in five states, and 30% of those were grandfathered from previous demonstration programs).  Forty-four percent of CAHs were converted during the last 7 months.  We caution, however, that CAH conversion volumes are not necessarily the only nor the best measure of program success.

• The Midwest string of states (South Dakota, Nebraska, Kansas, Oklahoma) has the most CAHs in the country.

• The hospitals participating in the RHFP are those the policy was targeting—small, low-occupancy, short-stay, high-Medicare hospitals with swing-bed operations.

• Most CAHs (58%) are in counties designated both as Health Professional Shortage Areas (HPSAs) and as Medically Underserved Areas (MUAs).  On average, CAHs enjoyed only 5.4 physicians per 10,000 population, compared to 6.4 for all rural hospitals. Two-thirds of the CAHs are located within counties that also have designated Rural Health Clinics. 

• While almost a third of CAHs are sole providers for remote populations (they are in “frontier” counties), there are still almost another third that are in the same county with another short-term general hospital.  Governors have been given the authority to allow hospitals to participate in the CAH program even when they are so close to another hospital.

• Preliminary analysis shows that CAHs that have converted through this point are those in financial distress.  For a sample of hospitals we visited, nine of ten typical financial ratios compared negatively to the median for all rural hospitals.  The capacity of the hospitals in the sample to continue to make payments on long-term debt also declined substantially after 1997.  Debt service coverage (the ability to make payments on long-term debt) rose slightly from 2.76 in 1996 to 3.25 in 1997, but had fallen sharply to 0.64 by 1999 (the higher the number, the more able is the facility to make the payments).  The liquidity (availability of cash to meet obligations) of the hospitals in the sample eroded since 1997, too.

• Only 37 percent of CAHs offer obstetrical care

• Conversions seemed to correlate with the following characteristics: 

  • Located in Oklahoma, Kansas, Nebraska, South Dakota or Montana

  • Located in a state which had previously participated in the Essential Access Community Hospital (EACH)/Rural Primary Care Hospital (RPCH) program or the Medical Assistance Facility (MAF) program

  • Located in a state that adopted the program early, executed the requirements to be approved by HCFA, and developed functional relationships with fiscal intermediaries and hospital associations.

  • Hospitals with high percentages of Medicare, low average daily census (4.3), and short lengths of stay (3.1 days)

  • Communities with small populations (under 10,000), lower than average physician to population ratios (5.2 physicians:10,000 population, compared to 6.1 for all rural communities), and in areas formally designated as underserved (92% were in either or both HPSAs and MUAs)

States

The Tracking Project team made site visits to 12 state offices regarding the RHFP.  The states have a consequential role in the RHFP.  Some states have taken this as an opportunity to work toward strategic policy goals with rural hospitals and communities, even when state goals are only tangentially related to RHFP goals.  While eastern states are more likely to engage in state policy leveraging behavior, western states seem more likely to stand back while they channel the funds and the program benefits to local rural hospitals.  Of course, there are arguments in favor of each of these strategies that depend on the state’s history, politics, and population philosophical stance. 

The RHFP offers an important opportunity to create or strengthen alliances between state offices of rural health and hospital associations.  States that participated in the EACH/RPCH demonstration or with a stronger history of sophisticated rural health policy were more likely to already have such a relationship in place.  The RHFP provides an opportunity for state offices of rural health to develop collaborative relationships with their state hospital associations, such as by contracting with associations for product deliverables or jointly offering technical assistance.  These relationships can extend or enhance the capacity of individual state offices of rural health during the development and implementation phases of the RHFP.

The RHFP did seem to create a focal point to nurture intra-state and cross-state networking and coalition building.  There were dozens of conference calls, time was devoted at National Organization of State Offices of Rural Health (NOSORH) meetings, and National Rural Health Association (NRHA) focused on the RHFP.  There was an excitement and enthusiasm about this new opportunity.

While federal goals for the program were not explicit in the legislation, it was clear that states were expected to develop “rural health plans” that would be approved as a prerequisite to designation as a Critical Access Hospital.  (It is not, however, a prerequisite to receiving RHFP grants from the FORHP.)  Our review has shown that most states paid limited attention to the planning functions and activities required by the program.  However, states with clearly articulated policy goals and rural health plans that support the achievement of those goals were more successful in implementing their RHFPs than other states.

Some states have taken the cue that emergency medical system (EMS) development in CAH service areas was a goal of the program, but not many have been able to follow through with meaningful program improvements.

State offices of rural health have been accustomed to obtaining grant awards in uniform, pre-determined amounts.  Even RHFP “start up” funds were distributed in this manner.  Subsequent RHFP grant awards required writing competitive grant proposals to the Federal Office of Rural Health Policy (FORHP), which were judged by review teams on the basis of merit and potential.  Writing these proposals was not a task relished by most state workers in offices of rural health.  This chore was described as “onerous” and “time consuming,” especially for small offices, and some were very disappointed in the large cuts in their proposed budgets.  The competitive nature of the granting program also limited some states’ eagerness to collaborate with other state offices.  However, others would argue that this process encourages states to focus on developing a plan.

States have used their federal RHFP grant funding very differently.  Some pass through the majority of funding to the communities, while others use it to enlarge staffs at the state level.  For some states, these are the first “grant” funds they have been able to make available to communities for rural health development.  The results have been to create a sense of collaboration and provide an important vehicle for the state and the CAHs to focus on priority issues on which they agree.  Some states with a limited history of contracting with hospitals ran into trouble working out contract rules within their bureaucracies, which was frustrating at both the state and local level.  More than half the CAHs we visited said the involvement of the state offices of rural health was very helpful in meeting their needs during the conversion process.

There seem to be three models of state implementation approaches:

• Highly structured, even regulatory, requirements for hospital participation (Alaska, North Carolina, Minnesota).

• Advocacy, facilitation, and assistance (Idaho, Montana, Oklahoma).

• Technical approach, focused mostly on the narrow scope of responsibilities associated with conversion (Missouri).

Hospitals

The Tracking Team conducted site visits to 24 CAHs.  Almost all of them (90%) had less than a year of experience in the program at the time of the visit, despite delay of the site visits until the spring of 2000.

Some characteristics of the site-visited hospitals are as follows:

• Almost two-thirds of these hospitals were operating under a management contract.

• Just over half (54%) had a formal network agreement with at least one other acute care facility.

• All hospitals reported their primary motivation for conversion was hope of improved financial performance.

• At least a third of these hospitals mentioned the very legislation that created the RHFP—the Balanced Budget Act (BBA)—as being the same culprit responsible for recent decreased financial strength of the facility.

• Hospitals were concerned about their scopes of services and struggled with these issues simultaneously with conversion.

• Physician opinion was very important to facility-level conversion decisions.

• Community participation in the conversion decision was eagerly sought by some hospitals, studiously avoided by a few.

Hospitals had to go through a new licensure survey from their state departments of health prior to conversion (and will have to do so again the next year).  Licensure surveys are never much enjoyed, but in this case it was more difficult than usual to know what to expect.  Especially for the first CAHs in a state, there were usually some policies or procedures that needed to be changed to meet program requirements.  One hospital had to install an $800,000 sprinkler system, but that probably would have been required at the next regular survey anyway.  In all cases, hospital staff put considerable effort into reviewing and revising hospital policies and procedures in anticipation of the survey.  They reported that they focused primarily on referral, discharge planning, emergency care, quality assurance, and credentialing issues.

The mechanics of getting a new provider number, completing cost reports for each provider number during the fiscal year, establishing a conversion date, and changing the billing system and “prices” were rarely described as smooth.  One hospital reported it would have closed because of a cash flow crisis if it had any debts to service during the conversion period.  Fiscal intermediaries and regional HCFA offices were perceived as unprepared and as not having thought through the logistics of CAH payment.  Many hospitals reported cash flow problems and delays in reimbursement related to CAH conversion.  The conversion was especially complicated if the conversion date was set on a date in the past rather than in the future.

We draw the following conclusions:

• Cost-based reimbursement should not be considered the single most important answer to hospital financial problems and should be included within a larger strategic vision.

• Broader networking beyond the minimum requirements of the program can make a positive difference in conversion outcomes.

• Working openly with the community at-large can be difficult, but beneficial.

• State offices of rural health can play a critical role as the brokers between the hospitals, regulators, licensing agencies, HCFA regional offices, Medicare fiscal intermediaries, and area providers.

• A solid partnership between the state offices of rural health and the state hospital associations can mean the difference between failure and success.

• A close working relationship with the Medicare fiscal intermediary can facilitate the conversion process by providing accurate data for making financial predictions and achieving timely conversion in reimbursement methodology and revenue flow.

• Financial feasibility analyses vary widely in quality; when modeling conversion scenarios, hospitals should select a firm that is both experienced with rural hospitals and in using cost report data to examine the feasibility of operational changes.

• Hospitals would benefit from a focus on the human as well as the organizational aspects of conversion, including issues such as levels of morale, understanding and preparation for the transition.

• Conversions should be scheduled with great care, allowing time for preparation and readiness, and scheduled for the end of the hospital’s fiscal year.

Finances

The primary reason hospitals indicated for choosing to convert to CAH status was the anticipation of obtaining cost-based Medicare reimbursement.  In states where Medicaid reimburses in a similar fashion, there was an even stronger motivation.

Ironically, the BBA created the seeds of financial trouble for small rural hospitals while at the same time creating a just-in-time mechanism for rescuing the same facilities through the CAH program.

Slightly over half of rural hospitals with an average daily census of under 20 are expected to have Medicare costs that are higher than Medicare prospective payments when the BBA is fully implemented.  Slightly less than half of small rural hospitals are expected to have costs that are lower than Medicare reimbursements.  Only the high-cost hospitals have an incentive to convert.

Many of the early converters were small before conversion.  This first wave of converts could obtain additional Medicare reimbursement without significantly changing their operations.

Emergency Medical Service (EMS)

The legislation that created the RHFP specifically permits states to use RHFP funds to improve their rural EMS systems, and the FORHP has recognized this emphasis by making EMS one of five areas that states are required to address in their annual RHFP grant applications.

States, however, showed considerable variation in the attention they paid to rural EMS needs and in the initiatives they proposed to address these needs.  In an ironic twist, financial crises come before emergency care. One site visit informant noted that, if struggling rural hospitals cannot be saved in the short-term by CAH conversion and the accompanying cost-based reimbursement, it is not worth worrying about more elaborate changes envisioned as keys to longer term survival.

Among the EMS initiatives mentioned by the 12 site visit states in their grant applications were:

• Development and/or funding of EMS training programs (a popular initiative).

• Scholarship funds to support EMS training.

• Capital improvements.

• Efforts to “improve recruitment and retention” (often ill defined).

• Creation of a multi-county EMS system.

• Creation of a centralized billing and inventory system for EMS providers.

• Collection and/or analysis of data (e.g., trip reports, supply of EMS providers).

• Education or technical assistance (e.g., to EMS providers, medical directors) regarding CAH conversions.

• Strengthening of medical direction.

• Development of collaborative dispatch effort.

• Telecommunication enhancements.

• Examination of possible expansions to scope of practice for rural EMS provider.

• Establishment of EMS patient assessment and transfer protocols.

• Development of EMS quality assessment tools.

• Conferences and workshops designed to bring together EMS providers, CAH representatives, and RHFP administrators.

• Various other efforts to “promote network development” (again, often not well defined).

It was not uncommon to find that state officials felt the need to collect additional information on the status of their rural EMS systems before formulating specific programs to improve these systems.  We found several examples of states using RHFP funds to collect this information, and they approached the task in a variety of ways.  We also found states tended to carry through on commitments to implement at least a portion of their proposed EMS activities, even when faced with reductions in their requested Year 1 budgets.

One immediate effect of the RHFP in many states was to improve communication between EMS personnel and state-level rural health personnel, and between management of newly-designated CAHs and EMS personnel within the CAH and within the community served by the CAH.

Two of the site-visited states are using RHFP funds to promote EMS system consolidation in projects that appear to hold promise.

A common theme expressed in many of our visits was that closer affiliation between the EMS system and the larger hospital network has many benefits, particularly if the larger hospital owns the EMS system.  In addition to improved medical direction, the benefits include:

• Sharing of equipment.

• Capturing economies of scale in training programs, billing systems, and procurement.

• Gaining access to the financial resources of the larger referral hospital.

• Gaining access to experts in a variety of fields, such as to marketing, human resources, and biomedical support.

• Standardizing performance improvement and utilization management with a larger system to compare against.

• Gaining access to sophisticated biomedical/equipment repair of the hospital.

• Within the network, there is an incentive to develop more defined standards for patient transfer and patient care.

It will be important to monitor the effect of the new Medicare fee schedule for ambulance trans­ports on the EMS systems serving CAHs.  Beginning in January 2001, all Medicare ambulance services will be paid for under a new Medicare fee schedule.  CAHs that operate their own or contract with an ambulance service will no longer be able to receive cost-based reimbursement for ambulance transports.  Because some CAHs or CAH-affiliated providers may see a poten­tially large reduction in their Medicare ambulance fees, this change may encourage hospitals to divest their hospital-owned ambulance services or to discontinue some contractual agreements.

Limitations

The Tracking Project has noted a number of trends in RHFP interpretation and implementation across the states.  Our sources of information come from a variety of data sources, including: the University of North Carolina’s quarterly telephone tracking survey, site visits to 12 states and 24 hospitals, the Technical Assistance and Services Center (TASC) for the Rural Hospital Flexibility Program, the National Rural Health Association, regional meetings of NOSORH (National Organization of State Offices of Rural Health), observations in our home states, and so on.  Nonetheless, there are limitations to this report.  These include:

Limited number of states in our study sample.   Although our 12 site-visit states were chosen deliberately, and we did make more casual observations in other states, this report details the experiences of only about a third of the participating states.  We anticipate that our telephone survey in Year Two will give a more comprehensive picture of the experience in all participating states.

We are focusing on converting hospitals.   We recognize that the experience of hospitals that elected not to convert may tell us as much about the program as those that did convert.  We did not collect that information in Year One, but intend to track some of this experience in Year Two.

It’s early still.   As the RHFP is embraced in more states and hospitals, and as the currently participating states and hospitals gain more experience, there will be more to say about the success and limitations of the program.

Comprehensive fiscal data are unavailable.   Few of the hospitals we visited (and few of the hospitals in the program) have completed a full year of experience in the program.  Therefore, few have Medicare cost reports that can tell the full story of how the program has affected bottom lines in participating hospitals.  Conversely, the cost to the Health Care Financing Administration is equally uncalculable.  These will be very important issues to track in Year Two.

One of the important accomplishments in Year One was to identify the most interesting issues to pursue in Year Two.  We will continue to look carefully at EMS, fiscal issues, tracking of information about conversion, and state policy development, but will also examine issues related to market share, scope of services, network development, quality of care, community development, non-converters, hospital administration, and physician participation. 

Findings from the Field

The Consortium is producing a series of short publications on a variety of programs and strategies we encountered during our site visits to hospitals and states during the previous year.  These publications are mailed to RHFP grantees, hospital associations, and selected rural health advocates around the U.S.  Below is a description of some of these publications.  Appendix 5 contains drafts of the findings documents.

From Idaho: The CAH Start-Up Kit

Eligible rural hospitals must jump through some hoops to convert their status to gain a “Critical Access Hospital” designation from state and federal agencies.  To assist these facilities in making the transition, the Idaho Hospital Association designed a “Start-Up” Kit to pull together various elements of the program for its members. The kit contains application forms, relevant state and federal rules, a financial feasibility tool for evaluating benefits of conversion, model policies and procedures for hospitals, and a model agreement with the hospital association to oversee credentialing and quality assurance.

From North Carolina: Strengthening Billing Systems for Rural Emergency Medical Services

The state office of rural health in North Carolina used its federal grant to demonstrate a new countywide billing system for EMS.  Halifax County, NC, will pilot the program to enable its EMS to collect fees for services to become more self-sustaining.  While setting up the system is expected to cost up to $170,000, revenues are forecast at $1.2 million, assuming only a 62 percent collection rate.

From North Carolina and Wisconsin:  The RHFP as a Vehicle for State Policy

The offices of rural health in North Carolina and Wisconsin both have clear visions for how rural hospitals can succeed, and are using the RHFP as a way to move towards specific outcomes.  In North Carolina, rural hospitals are expected to develop network relationships that consist of direct ownership of the CAH by the support hospital, or, at least, a strong management contract.  These networks are expected to develop strong working relationships with public health, transportation services and other community-based health care resources.  In Wisconsin, a grant program was created which promotes both facility-specific conversion goals and state office goals in its state rural health plan.

From Oklahoma and Wisconsin:  “Right Sizing” – Matching the Scope of Services to the Population

When hospitals elect to convert to CAH status, they often simultaneously face decisions to eliminate or reduce services, or to add services.  These decisions are best made as part of a strategic planning process that begins by assessing the needs of the local population.  In this publication, we highlight two hospitals and interesting decisions they made in regard to scope of services.  Atoka, Oklahoma, decided to redeploy its underutilized CT scan as part of a thrombolytic therapy program for clot-induced strokes.  To do this, the administrator found a therapeutic radiology partner in another state who was able to read Atoka’s scans through tele-radiology.  In two other examples, CAHs without the ability to offer an obstetrics program elected, instead, to offer programs that would connect equally well with the same populations.  A hospital in Hillsboro, Wisconsin, is offering licensed daycare and a hospital in Marietta, Oklahoma opened a school-based clinic program.

From Arkansas, Georgia, North Carolina and Texas: Revenue Enhancement and Cost Containment Strategies

Since CAH cost-based reimbursement works only for Medicare patients (unless states have followed suit with their Medicaid programs), hospitals need a more comprehensive strategy for ensuring financial success.  We found six revenue-enhancement strategies and four cost-containment strategies to be common: offer new services, negotiate better rates with other payers, review pricing, pursue managed care contracts, pursue non-patient service revenues, improve cash flows, consolidate business functions with the networked hospital, reduce bad debt, review money-losing services, and review equipment and supply costs.

From Critical Access Hospitals in Multiple States: Strategic Planning and the Balanced Scorecard

In pre-visit questionnaires completed by hospital staff, two-thirds of hospitals reported they had strategic plans.  We asked questions about perceived strengths, weaknesses, and initiatives in the same questionnaire, and discovered about half the hospitals reported major strengths in four of the areas considered key to a balanced strategic approach: financial, customer, internal processes and learning/growth.  The majority of hospitals cite their major strengths as being in the domains of customer service, and major problems being in the area of finance.  Of the hospitals intending major initiatives, most are aimed at at least one of their major problem areas.  However, half of the major problem areas cited by hospitals are not being addressed now, nor are they likely to be addressed in the next three years.

From Arkansas, Georgia, North Carolina, and Texas:  Physician Recruitment and Retention

Recruitment and retention of medical professionals is a chronic challenge for rural hospitals.  Some of the CAHs we visited are employing both tried-and-true and innovative strategies.  CAHs are providing physician office space in exchange for emergency room coverage time, purchasing equipment desired by physicians for niche services, offering assistance with practice management, supporting medical school preceptorship experiences, providing backup relief, crafting tailored compensation packages, sponsoring students who will return with an obligation, seeking grants for loan repayment, and participating in recruitment fairs.

From Montana and Other States: The Mini-Grant Program

The experience in states which choose to distribute mini-grants to hospitals involved in the CAH conversion process was found to be different than in states where the RHFP funds are used centrally for expanding office staff.  Grants to hospitals created a sense of collaboration with the state office and gave the hospital a sense of obligation to work together with the state in the conversion process.  Montana made available almost a third of its grant through mini-grants, and used a very simple application process to distribute the funds in amounts ranging from $1,500 to $10,000 per hospital.  Missouri, Wisconsin, Maine and Oklahoma also established mini-grant programs.

States Are Using a Variety of Approaches to Collect Information on their Rural EMS Systems

The state office of rural health in North Carolina used its grant to help establish a new countywide billing and inventory control system for EMS in one county with a CAH.  Revenues from the billing system that was introduced this year are forecast to reach $1.2 million, with a collection rate of 62 percent.  Improved revenue collections are enabling this county to strengthen its pre-hospital support system.

Upcoming publications will include:

• From Nebraska: Media Communication Kit.

• From Washington: Econometric model for modeling changes in the economy, demographics or health system.

• From Texas: Calculating the dollar benefit of CAH conversion.

• Various states (MT): Partnerships between state offices of rural health and hospital associations.
  Community Strategies.

Year Two Preview

In Year Two, centers will continue to conduct site visits and will produce the following reports.  See full Year Two proposals at the FORHP.

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