Executive Summary

Rural Hospital Flexibility Program Tracking Project

Executive Summary

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

The Rural Hospital Flexibility Program (RHFP) was interpreted by Congress to provide financial relief to America’s smallest and most vulnerable rural hospitals. RHFP was passed in 1997 as part of the Balanced Budget Act (BBA). The Federal Office of Rural Health Policy (FORHP) became the implementation agency, and it in turn contracted with its designated Rural Health Research Centers to track the progress of the program. This report covers the first year of the Rural Hospital Flexibility Program Tracking Project, 1999-2000.

This Executive Summary offers observations and summary statements that are further substantiated in the following chapters.

1. There have been many conversions to Critical Access Hospital (CAH) status. One hundred seventy hospitals have been designated as CAHs as of May 31, 2000. That is significant growth in a program that is so new. See Chapter 3.

2. Even in these early stages, the RHFP is promising. The enthusiasm for the RHFP is significant. The program has generated a great deal of dialogue among rural health advocates, practitioners, policy makers and others. Regional, state and local meetings are held to discuss how the program can be used to strengthen and expand health services in rural areas. Many players from a number of sectors are involved in networking and coalition-building to an unprecedented extent, much of it fueled by resources and energy supplied by the RHFP.

3. FORHP has articulated five goals for the RHFP. While goals are not explicit in the legislation, the Health Care Financing Administration (HCFA) and the FORHP have deduced and interpreted the goals of the program. FORHP articulated those in its request for proposals from state offices of rural health. These include: developing state rural health plans, designating CAHs, developing rural health networks, improving emergency medical services (EMS), and enhancing quality of care. States are variously interpreting how they will address those goals.

4. There are key factors that predict the success of a CAH conversion process. Site visits for this Tracking Project determined that the following elements are key to successful conversions: internal hospital systems changes, community support, help from state agencies, help from a network hospital, and consulting support. Internal hospital elements include buy-in and enthusiasm of physicians, emphasizing the role of the emergency room as a portal to the community, improving administration, cross-training, systems for reminding staff of changes in operations, keeping up morale, eliminating extraneous efforts that distract from priorities, generating new revenues from new services, and securing board support. See Chapter 5.

5. Successful implementation of RHFP extends beyond the numbers of conversions. Some states have many CAH conversions, some very few and others none. The states focused on ensuring the conversions are appropriate, and performed after a process of community involvement may not have the most conversions. States that had pre-cursor programs, such as Essential Access Community Hospital-Rural Primary Care Hospital (EACH-RPCH) or Medical Access Facility (MAF), grandfathered those facilities into the RHFP and therefore have larger numbers of CAHs. See Chapter 3 and Chapter 4.

6. New relationships are being established between offices of rural health and hospitals. Many offices of rural health (ORH) are diverting large portions of their federal grants to fund projects in individual communities. These mini-grant programs are very popular, and are funding activities such as feasibility studies, community development work, equipment, and technical assistance with network formation. See Chapter 4.

7. RHFP funds support infrastructure building. CAH funds are flowing to a number of organizations and institutions that work to maintain an ongoing capacity to provide rural health. This funding, therefore, can be viewed as supporting basic infrastructure that directly aids rural hospitals and health delivery organizations. See Chapter 4.

8. Hospital association and office of rural health relationships are key. States that already have strong relationships between the state office of rural health and the state hospital association were able to move ahead quickly on implementing RHFP. In states where there was not a pre-existing strong relationship, 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 states of the RHFP. See Chapter 4.

9. Quality assurance and credentialing requirements have resulted in structural changes. The quality improvement goals of RHFP have resulted in real changes in how rural hospitals organize those processes. Sometimes the changes are purely cosmetic, but in many cases the requirements have provided the motivation needed to create relationships with outside entities to strengthen those processes. See Chapter 5.

10. Network creation was sometimes very helpful, sometimes just an exercise. Some states required all CAHs to belong to networks, while other states met the federal requirement with only minimal network creation. As a corollary, some hospitals met the network requirement with a minimalist exercise of creating transfer protocols, while others created new and energizing relationships with network partners, leading to improvements in scope of services, quality of care and financial stability. See Chapter 4 and Chapter 5.

11. Financial relief from BBA ‘97 was critical. The RHFP may not have come in time to save some rural hospitals from the consequences of BBA Medicare cuts, and it may not prove to be real relief for others. Nonetheless, rural hospital margins were seriously threatened and the program arrived none too soon as a means of stabilizing the financial conditions of many rural hospitals. Although it requires a complete year’s cycle to create the cost reports that will validate our early assertions, many hospitals perceived that this program provided the financial cushion to allow them to think about long-term issues rather than focusing solely on current financial crises. See Chapter 6 and Appendix 1.

12. The first hospitals to convert to CAH status were those where the least changes were made to meet the requirements. These were the smallest hospitals, hospitals which easily met the mileage requirements, hospitals where the length of stay was short enough to meet the 96-hour requirement, and hospitals where swing beds were already in place. Nonetheless, they need to go through the licensure survey process, and make changes to or develop new policies and procedures, requiring a certain amount of capacity, initiative and organization. See Chapter 3.

13. Role of management firms in promoting the program turned out to be important. A number of hospitals were motivated to convert because of their management companies. When management companies cross state lines, they are exposed to the program from a variety of state perspectives. In one state, for example, the program is moving very slowly but two hospitals converted because their management companies (two different companies) had experience with the program in other states. See Chapter 5.

14. Characteristics of CAH conversion communities indicate the program is reaching the intended population. The median population of communities with CAHs is 9,752—much smaller than the “all rural hospital” median of 23,826. More than half of the communities (58%) were designated as BOTH kinds of health professional shortage areas (HPSAs and MUAs). Only 8 percent were neither HPSA nor MUA communities. See Chapter 3.

15. CAH conversion and network affiliation are not silver bullets. While cost-based Medicare reimbursement is very helpful to many, if not most, of the hospitals targeted by the RHFP, it will not solve all their problems. Medicare is not the only payer. Some vulnerable populations, such as the working poor, obstetrical patients, and American Indians, are not typically covered by Medicare. And reimbursement for costs alone does not provide the necessary funds or cash flow for equipment and physical plant replacement and expansion, nor does it provide the funds necessary to relieve previously-incurred debt.

16. Medicaid and the Indian Health Service are not consistently participating. In twelve states (Florida, Idaho, Kentucky, Maine, Minnesota (outpatient only), Montana (inpatient only), North Carolina, Nebraska, Nevada, Oregon, Texas and West Virginia), Medicaid is following suit with Medicare and is reimbursing on a cost basis. The Indian Health Service has not yet committed to participating, and some hospitals are anxiously awaiting its decision to do so. See Chapter 4 and Chapter 5.

17. The Health Care Financing Administration (HCFA) and its Fiscal Intermediaries were not well prepared to implement the CAH program. Hospitals going through the conversion process found the process to be slow, unclear and fraught with error. The selection of a conversion date was often retroactive, causing the need to “unbill” and “rebill” with attendant cash flow problems and costs. See Chapter 4.

18. Lab reimbursement remains a hurdle. Many of the financial feasibility studies that modeled the benefits of conversion for hospitals indicated that lab fees composed a large portion of any additional revenues to be realized. The Balanced Budget Refinement Act (BBRA) language confused the issue of how lab reimbursement works for CAHs. This created a barrier for a number of hospitals considering conversion (whole states are waiting the resolution of this question before converting any additional hospitals), and has reduced the benefit of conversion for others.

19. Certificate of Need is a barrier in some states. The 10 swing beds that CAHs are allotted in the federal legislation are not necessarily obtainable under state Certificate of Need (CON) laws. CAH conversions in some states are being seriously delayed by their requirements to have a full review for swing beds under CON laws. See Chapter 4.

20. Medicare ambulance fee schedule and RHFP goals may not be compatible. 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. See Chapter 7.

21. CAHs face change in the Medicare outpatient payment system. In the original legislation, CAHs could bill for physician services provided in their outpatient settings (regardless of whether the physician was a hospital employee) under an “all-inclusive” rate calculated on the basis of costs. Under the BBRA, this option was changed to limit the amount of payment hospitals could bill to what the physician would be paid under the Medicare fee schedule. This means CAHs have lost a valuable tool and incentive for networking with physicians and other providers. Simultaneously, CAHs are faced with participating in data collection for HCFA’s outpatient prospective payment system, even though CAHs are expected to be held harmless from any losses attributable to it. There are costs associated with this data collection.

22. HCFA reimbursement systems are complex and complicated. Hospital administrators, board members and physicians voiced cynicism about the ever-changing system of rules and regulations under which they operate, and many are convinced that as soon as their hospitals master the current set of rules and begin to stabilize their operations after the BBA, the rules will change again and they will be back where they started.

23. Financial feasibility studies may not be reliable. There are many financial feasibility prediction tools and consultants who employ them. The results of these can vary significantly. Without a standardized or validated approach, hospitals are making important choices based on sometimes flawed information.

24. Multiple things are going on at once. Any study of rural hospital changes is necessarily complicated by the complex environment in which they operate. Are the fortunes of the CAH up or down because of its conversion, or are they the result of changes in administration, market factors, HCFA reimbursement mechanisms, managed care, physician recruitment or losses, or other factors?

25. Program could lose its focus. To date, most of the states we visited have employed very broad criteria for designating CAHs and targeting grant or other technical assistance. CAH hospital administrators and others we spoke with raised some concern that the use of very inclusive criteria may change the original intent of the program and may undermine the achievement of some of the program’s fundamental goals. Specifically, the broad criteria, together with the change in the 96-hour rule, may undermine the fundamental program incentives to pursue serious network development, in which case, hospitals are primarily motivated by the prospects for cost-based reimbursement. See Chapter 4.

26. Hospital administrators are key. Regardless of the federal reimbursement mechanisms in place, a critical factor in rural hospital success or failure remains the quality of leadership at the facility. This requires good teamwork among the hospital medical staff, governing board and administration. As the head of the team, the hospital administrator is critical. See Chapter 5.

27. Physician involvement is essential. Hospitals and their physician staffs typically engaged in serious conversations prior to making the conversion decision. In some ways, this program offered an opportunity to bring together physicians and hospitals in a strategic thinking process that may have been long overdue in some settings. See Chapter 5.

28. State rural health plans are of variable utility. Some states go through meaningful processes to produce state health plans that really reflect goals and priorities for rural health policy in their states. In other states, however, the plans (and their development processes) are simply empty exercises. There may be better proxies for demonstrating that key players have worked together to plan for improved rural health outcomes. See Chapter 4.

29. The program is moving more quickly in some states than others. Thirty-seven states have submitted state rural health plans to HCFA and had them approved; another two are pending. Nine states are still working on their plans. Two states are not eligible. That leaves nine states not yet participating. See Chapter 3.

30. Some states have strong rural health agendas, and used RHFP as another stepping stone to accomplishing their plans. In the states with strong and clear rural health plans (written or otherwise), the RHFP offered another vehicle for getting those plans accomplished. Some state offices made very specific requirements of hospitals before allowing them to convert to CAH status. Some states felt it was their role to facilitate the needs and desires of their hospitals, rather than impose an agenda of their own. These two views are both accommodated when Congress allows states to interpret the legislation liberally. See Chapter 4.

Chapter 1: Introduction (WWAMI)

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Last modified: 05/07/08