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Rural Hospital Flexibility Program Tracking Project

Chapter 1
The Evolving State Role in the Implementation
of the Rural Hospital Flexibility Program

Andrew F. Coburn, Ph.D.
Maine Rural Health Research Center
Muskie School of Public Service, University of Southern Maine

Introduction

As indicated throughout this report, the pace of implementation in the Rural Hospital Flexibility Program (Flex Program) has increased dramatically in the second year. The number of hospitals that have converted to Critical Access Hospital (CAH) status has more than doubled. As important as these conversions are as indicators of program success, there are critical, collateral activities--many of them undertaken by the states--that are also useful gauges of implementation success and, to a limited extent, of program impact. The states' roles in the Flex Program have been growing and evolving, from rural health plan development and implementation to providing funding and technical assistance for hospitals and communities to build and/or strengthen their rural health networks. This chapter reports on this evolving role and the experience of states in the continuing implementation of the Flex Program.

In this second year, the Flex Program Tracking Team conducted site visits in an additional eight states (plus a ninth state selected for an emergency medical service [EMS] visit). We also tracked continuing developments in the 12 states that were visited last year. Each of the state-level site visits was conducted by a team from one of the five collaborating rural research centers using a common, semi-structured site visit protocol (see Appendix D). This protocol focused on most of the same issues covered in our first year site visits, but included additional items related to special studies that centers were conducting in this second year. Each site visit team prepared site visit reports, which have been shared and discussed by the Tracking Team. This chapter not only summarizes the findings from our nine new site visits, but also uses the findings from our first year to identify and analyze four central questions:

1. What implementation strategies and activities have the states pursued, and how have these changed from the first year? 

2. What successes and challenges have the states had in implementing this program? 

3. What factors contribute to successful state-level implementation?

4. What are the future opportunities for continued development and success in the Flex Program?

Year 02: State Implementation Activities

State-level implementation activities are changing in response to the evolving needs and circumstances of the Flex Program. In the first year of implementation, most states were focused primarily on developing policies and procedures for program implementation, communicating with hospitals and others about the program, and assisting with early conversions. With most of their "systems" in place, and conversions proceeding smoothly, many states seem to be moving to the "second generation" of the Flex Program. Increasingly, these states are shifting their attention and priorities to a set of longer-term issues, including: 

• Honing state priorities for the program;

• Focusing on longer-term rural hospital and health systems performance issues by targeting technical assistance in areas such as strategic planning and quality improvement; and

• Beginning to focus on more difficult issues such as lasting structural improvement to rural EMS systems and the capital needs of rural hospitals.

This evolution of state implementation activities is not surprising -- we would expect this with the maturation of any program like this one. What is especially important about the experience of these states, however, is that it may indicate the future directions of the Flex Program. As such, this section summarizes the trends in state implementation activities and experiences that we have seen in this second year and examines the lessons that they might have for future Flex Program priorities. 

Conversion Activities 

In each of the states we visited in the second year, the state office of rural health¹, state hospital association, state health facilities licensure and survey agency, and other organizations involved in CAH conversion activities had achieved a "steady state." That is, they had generally identified and worked out whatever problems they had encountered in the early phase of Flex Program implementation. With the conversion mechanics established, states continue to spend the bulk of their time and resources conducting a set of core conversion-related activities, including:

Communication with Hospitals Recently Converted or Considering Conversion: The states we visited are all actively communicating with hospitals that had recently converted to CAH status and those considering conversion. Through these communications, the state implementing organizations are providing assistance on issues that the hospitals are encountering. They are also providing a means for the states to identify and monitor common issues across the experience of these hospitals.

Coalition-Building: Building and sustaining a coalition of hospitals and other organizations involved in and/or supportive of the Flex Program has been central to the success of Flex Program implementation in many of the states we have visited. States have developed and are supporting both formal and informal coalitions of interested stakeholders. Most states have sponsored annual or semi-annual meetings/conferences with CAHs, hospitals considering conversion, consultants and others involved in the Flex Program. These meetings have become large events in many states involving a wide variety of participants including hospital staff and trustees, community agency representatives, state and county officials, hospital and other association representatives, elected local and state officials, EMS and licensure agency staff, and peer review organizations (PROs), among others. Participants we spoke with were uniformly enthusiastic and positive in their assessment that these meetings have had an important educational, technical assistance, and networking value. 

Technical Assistance (TA) and Conversion Trouble-Shooting: The TA activities of the states we visited are focused primarily on: (1) helping hospitals assess the appropriateness of CAH conversion, (2) assisting with the conversion process, and (3) continuing to assist hospitals that have converted.

In addition to general consultation with hospitals considering conversion, states and their hospital association partners are providing support through the Flex Program grants to assist hospitals to conduct financial feasibility analyses to determine whether conversion makes good financial sense. All of the states we visited are also providing various forms of TA to help hospitals successfully negotiate the conversion process. For example, virtually all states are assisting hospitals to prepare for the facility survey that precedes conversion. Many states are providing assistance to hospitals to develop and conduct their community needs assessments. 

Although states are required to demonstrate the development of only a single rural health network, virtually all the states we visited are actively encouraging the development of network relationships as a central component of the Flex Program. Many states are using their Flex Program grant funds to support hospital network development. In some cases, like North Carolina, the state office is providing assistance to CAHs to evaluate potential network partners and arrangements. The Flex Program meetings and conferences that states sponsor are important vehicles for encouraging communications among potential network partners. 

Unlike the states' conversion assistance activities, the states' efforts to assist CAHs to identify community service, access or networking needs may encourage long-range planning beyond conversion. As CAHs stabilize their financial conditions, they face critical choices concerning the best means for rebuilding their market shares and re-positioning themselves in their local markets. To encourage and assist CAHs to move in this direction, several states, including Michigan, have been interested in developing TA assistance around strategic planning.

State Priorities and the Impact of Flex Program Grants

The grant funds available through the Flex Program to support hospital conversion and technical assistance activities continue to be vital to successful program implementation. In Year 02, the federal Office of Rural Health Policy (FORHP) awarded $23.5 million in grants to the states. In most cases, state grant awards increased over amounts awarded in Year 01. 

In keeping with the changing focus of the states' TA activities, there has been a corresponding evolution in the states' priorities for the use of their grant funds. Whereas most of the grant funds in Year 01 were used to support hospital conversion activities, some states have begun to target the use of their grants to a wider range of state priorities for the Flex Program. In some cases, these represent new priorities. In Michigan, for example, the state has introduced a priority for broad-based community health and social service agency involvement into their networking priorities for CAHs. This broader focus aligns Flex Program objectives with existing state community health development initiatives. Other states, including Arkansas, have targeted the development of quality assurance/improvement activities. Consistent with last year's findings, however, the majority of states have used their grant funds to support:

• State activities associated with rural health planning activities;

• The CAH designation and conversion process at the state level (including survey and technical assistance functions);

• Hospital-level conversion activities such as community needs analyses and financial feasibility studies;

• EMS improvement activities;

• Quality assurance/quality improvement initiatives; and

• Rural health network development.

The majority of states we visited have targeted most of their grant funding either directly or indirectly to hospitals to support community studies, financial feasibility analyses, network development, and other activities associated with hospital conversions. States have also used their Flex grants to enhance their technical assistance capacity by hiring additional state staff or consultants. For example, Wisconsin has pooled some of its Flex grant funding to develop shared consulting contracts in five areas, including financial analysis, community needs assessment, telehealth development, staff development, and EMS assessment. The Center for Rural Health in Michigan, which has implementation responsibility for the Flex Program, has used some of its Flex grant dollars to hire a physician recruiter to assist CAHs with their recruitment needs. 

The availability of Flex grant funds continues to be very useful in building hospital support for the Flex Program and for the state offices of rural health. Grants have enabled the states to leverage interest, support, and commitment on the part of eligible hospitals, the hospital associations, and other stakeholders. Generally, states are limited in their regulatory leverage over hospitals through the licensure and survey process. Since these processes are not usually located within offices of rural health, the advent of the Flex grant funds holds the potential to strengthen the state offices' position as key players in the state.

There are significant variations in the scope of state implementation activities across the states. Many of our site visits have been to atypically larger states (e.g. North Carolina, Michigan, Texas) that have larger, well-established state office of rural health programs. Many states, however, have small offices of rural health. Naturally, these smaller state offices have fewer staff and therefore more limited planning, technical assistance, and administrative capacity, and cannot undertake the same scope of implementation activity as the larger state office programs. In general, the larger state office programs have a greater capacity to anticipate and respond to the technical assistance needs of hospitals and communities, to engage in policy coordination activities, and to develop the policy and political influence needed to bring state government attention and resources to support the Flex Program. In some cases, states have compensated for their small size and capacity by partnering with their state hospital association or other organizations to perform key implementation functions. 

Both the federal government and the states have placed a priority on targeting as much Flex grant funding as possible to "on the ground" assistance to hospitals and communities. This priority has been reflected in the criteria used for determining the level of funding across the states. These priorities are understandable given the limited funding available under the Flex grant program, and the interests of federal and state policy makers in helping hospitals move as quickly as possible toward conversion.

Nevertheless, our site visits indicate that building state capacity to effectively implement the Flex Program remains an important need in a number of states. In some states, the limited staff and resources of the state office of rural health is inhibiting its ability to address some of the priority needs and activities identified in state rural health plans. Many of the rural health planning, community needs analysis, and technical assistance functions called for under the Flex Program require specialized skills and resources that, by definition, are unlikely to all be found in a one-person state office of rural health. Unfortunately, the funding available under the Flex Program in many states is not sufficient to enable the states to adequately fund grants to hospitals or other local entities (e.g., EMS provider groups) and use their Flex grants to add to their state office capacity to perform these functions. 

Adding to state administrative or program staff is unlikely to be popular either federally or among the states. Yet stronger state-level rural health policy and program implementation staff and resources are needed if states are to effectively take on the full range of Flex Program implementation and rural health plan management functions.²

Rural Health Planning and Policy Coordination

Rural Health Plans: In their second year Flex grant applications, many states indicated they would be updating their rural health plans. In the majority of states we visited, however, state officials noted that the process of updating their plans was a second or third-tier priority behind their conversion assistance and attention to other program goals. The role and function of the required rural health plans required by the Flex Program remain ambiguous and are not central to many states' program implementation activities. 

Designation Criteria: With the growing number of hospital conversions there is increasing federal attention being paid to the criteria that states are using to identify hospitals eligible for CAH conversion. In the first wave of site visits last year, we found that states were using a variety of criteria for designating CAHs and targeting grant funds and other technical assistance. Some states were being very inclusive in setting criteria while others were more narrowly targeting their CAH criteria and Flex grant funds. This pattern was evident in the Year 02 site visits as well.

Most states are using the provision in the federal regulations that allows for the state to designate "necessary" providers, thereby allowing hospitals that do not meet the 35 mile separation requirements to participate in the program. This provision has been particularly important for states such as Nebraska where there are large numbers of small rural hospitals located relatively close to one another. 

The typical strategy selected by states that adopt an inclusive approach to the program is to broaden the eligibility criteria. This is most commonly accomplished by reducing the minimum allowable distance between rural hospitals from 35 miles as mandated in the federal regulations to as low as 15 (or fewer) miles and applying standards that allow hospitals to qualify as "necessary" community providers whose closure would present a threat to the health of the residents of the area in which they are located. These criteria generally involve some standard of demographic, health, or economic hardship. Typically, a hospital has to be located in a designated shortage area or in an area that has significant vulnerable, underserved populations as defined by the percentage of elderly and/or low income residents, the level of unemployment and/or uninsurance, and/or death rates from defined leading causes of death. 

As discussed in Chapter 2, CAHs tend to be located in areas with limited health personnel and vulnerable populations, consistent with the states' designation criteria. As we reported last year, at least one state has tied its designation process to explicit expectations for CAHs. In North Carolina CAHs are expected to serve as safety net providers in caring for uninsured and other vulnerable patients. Although it is still early in the Flex Program, more formal documentation of the extent to which CAHs are serving as safety net providers or are helping to build or sustain the local or regional rural health infrastructure could be very helpful in tracking program success and in building or sustaining policy support for the Flex Program. Developing the conceptual and methodological basis for doing such tracking is an important priority for the future of the Flex Program.

Medicaid Policies: The involvement of state Medicaid programs in the implementation of the Flex Program has varied considerably over the first two years. In an increasing number of states we have visited, state offices of rural health and CAH hospital contacts report the growing importance of the Medicaid program to CAHs. In particular, they have identified Medicaid payment for inpatient and outpatient services as a significant issue in implementing the Flex Program. The importance of Medicaid payments to rural hospitals is likely to grow in the future as state Child Health Insurance Programs and other Medicaid expansions are enacted and their enrollments mature. 

In some states that have not moved to Medicaid cost-based reimbursement for CAHs, state offices of rural health are actively working with their Medicaid agencies and/or legislature to promote the adoption of cost-based reimbursement for CAHs. In other states, however, the state office has not even attempted to change current payment policies, either because they take a passive approach to policy development or because they know their efforts would be futile. 

From our tracking work we know that fewer than half of the 47 states³ participating in the Flex Program have established Medicaid policies to reimburse CAHs based on costs for outpatient and/or inpatient services. Some states, like Minnesota, however, have special Medicaid hospital payment methods that, although technically not cost-based, are at least as generous as cost-based payment. 

In examining the role of the Medicaid program, we were also interested in the impact that Medicaid managed care programs might have had on CAHs, especially where those programs (e.g. Michigan, Tennessee) require that CAHs accept capitated or discounted payments for services provided to Medicaid beneficiaries. The stories we heard were mixed. In Michigan, Medicaid managed care does not appear to have been a significant problem for CAHs. For example, where most hospitals are paid discounted rates by the handful of plans that offer a Medicaid product, one hospital administrator, although not enthusiastic about the rates he was being paid by the plan, was actually optimistic about the potential benefit that a greater volume of Medicaid business could have for his hospital. In contrast to this Michigan experience, we learned in one CAH in Tennessee that physician payment rates under TennCare had prompted physicians to leave the program, resulting in the CAH having to cover the care for Medicaid beneficiaries unable to access physicians in the area.

In addition to whether Medicaid pays cost-based reimbursement, our site visit findings indicate that it is also important to consider the impact of other Medicaid program features and policies on the Flex Program. These features include, for example, Medicaid eligibility and benefits policies, payment policies affecting Rural Health Clinics, Federally-Qualified Health Centers and other rural "safety net" providers, disproportionate share policies, and Medicaid policies governing long term care payments, eligibility/patient assessment, and swing beds. In West Virginia, for example, where CAHs are paid on a cost basis under Medicaid, we discovered the state's disproportionate share policies (DSH) have created a significant incentive for CAH conversion. Specifically, the state calculates most hospitals' DSH payments by summing their charity care and Medicaid "discounts." Most hospitals are entitled to 50 percent of this amount. CAHs, however, receive 100 percent of this amount, providing a significant incentive for hospitals to consider CAH conversion. This differential diminishes in subsequent years because of Medicaid cost reimbursement. 

Minimum Data Set: Hospitals with swing beds are currently required by Medicare to complete the Minimum Data Set (MDS) assessment on all swing beds patients. In the second wave of site visits, this requirement was identified by state and hospital officials as costly, burdensome, and unnecessary given the nature of the swing bed program. The American Hospital Association and others are actively working to change this policy. 

Lessons Learned and Policy Considerations 

Many states, and especially those that have mastered the hospital conversion process, are looking beyond hospital conversions to identify new strategies for furthering the Flex Program's underlying goal of strengthening the rural health infrastructure. These states tend to view CAH conversions as a necessary but insufficient answer to the problems that rural communities face in sustaining (or developing) an appropriate rural health system. Among the key issues that these states are identifying are:

• Sustaining or improving the quality of care provided in rural areas;

• Addressing the capital needs of hospitals and other rural health providers;

• Building an appropriate continuum of primary, specialty, acute and long term care services; and

• Improving emergency medical care.

The agenda of needs and program strategies are evolving; states appear to be developing a vision for the future of the Flex Program. In doing so, it is important that they and others concerned with the Flex Program consider the experience of the states to date and their implications for the future. Some of these lessons and their implications for the future of the Flex Program are summarized in this last section.

Variations in State-Level Implementation and 
Building State Rural Health Development Capacity 

As indicated above, we have observed significant variations in the resources available to state offices of rural health for the implementation of the Flex Program. Some states, like Minnesota and North Carolina, have large rural health programs with many staff, multiple programs, and diverse sources of federal, states and foundation funding for rural health initiatives. Many other states, however, have fewer staff (some are one-person offices), are smaller, and therefore, offer fewer services and programs. As might be expected, these smaller offices face greater challenges in implementing the Flex Program. With fewer staff, they have to rely on their partnerships with the state hospital association, other state agencies, or other organizations to provide assistance with the implementation of the program.

These variations are associated with differences in the scope of Flex Program implementation across the states. However, the size of the state and its rural health program alone are not adequate for explaining the variations in implementation experience across the states. For example, as states like Montana demonstrate, political and policy leadership and advocacy on behalf of rural health are usually more important than size in determining the effectiveness of the state's rural health programs. In order to understand better the characteristics of states and how they might be influencing the implementation of the Flex Program, we have used our 20 state-level sites to create composite portraits of the states. For the sake of discussion, we see three categories of states: 

• The "early adopters,"

• The "in process" states, and 

• The "emerging" states.

We purposely use non-judgmental terms in labeling these categories because we are not interested in judging states. Our aim in characterizing the states in this way is to understand better how and why states differ in their approach to implementing the Flex Program and in their commitment to and capacity for rural health development. 

"Early Adopter" States: States in this group have responded quickly to the opportunities afforded by the Flex Program in order to advance pre-existing state rural health priorities. As such, they have clear policy priorities that are reflected in their use of Flex grant funds, in their designation criteria, and in their implementation support and other activities. As the program has evolved and conversion activities become more routine, states in this group have identified new needs and priorities and developed corresponding policy and program initiatives. These states have moved quickly and effectively to develop coordinated policies and procedures for enabling hospitals to covert to CAH status. They have also marketed the program widely to a broad range of rural health stakeholders, primarily rural hospitals and communities, and to policy makers. The states in this group have built a strong coalition that provides a base of political and policy support for rural health generally and the Flex Program specifically. Other distinguishing characteristics of these states include the following:

• They have developed a critical mass of technical assistance, policy development, and demonstration or assistance staff, programs and/or resources;

• The office of rural health has gained support from rural health constituencies;

• The state is involved in strong partnerships with other organizations concerned with rural health;

• There is strong and influential political and policy support for rural health in the legislature and/or governor's office; and

• The state has a history of policy interest and investment in rural health programs (e.g. health personnel programs, network development programs, capital assistance programs).

"In Process" States: The states in this group tend to be characterized by the ad hoc, grant-driven nature of their rural health programs. They have sought and obtained available grant funds to support a variety of rural health initiatives, but have not yet achieved the degree of program synergy that characterize states in the "early adopter" category. Most of the rural health funding in these states tends to be federal, with only limited state support. This situation reflects the more limited base of policy and political support for rural health in these states, compared with the "early adopter" states. This more limited base of support reflects the fact that these "in process" states do not have strong coalitions of stakeholders. Implementation of the Flex Program in these states has focused primarily on hospital conversions, with more limited attention to rural health network development, community development, and other priorities embedded in the program. 

"Emerging" States: These states tend to be characterized by their dependence on federal grant support for all of their rural health activities. In fact, without such funding, it is unlikely that they would support an office of rural health. This reflects the limited policy and political support for rural health in the state. Because of their dependence on federal grant funding, the state offices of rural health in these states tend to be small, with limited staff and resources for carrying out their functions. If these states have stakeholder coalitions, they tend to be weaker than in other states and to have a limited policy impact. Implementation of the Flex Program in many of these states has been slow, with few CAH conversions. Other state office activities and functions, such as technical assistance, have also been limited. 

State political cultures affect the degree of state direction and leadership that is possible or desirable in any particular state. Nevertheless, it is clear that strong state leadership and capacity make a big difference in rural health development. The states that we have described as "early adopter" states have generally been more successful in implementing the Flex Program than states with a more limited commitment to and capacity for rural health development. 

What does "state capacity" mean in the context of the Flex Program? Most importantly, it means having strong leadership that can catalyze interest and support among stakeholders for an agenda for Flex Program implementation. This leadership can come in the form of a strong state office of rural health director, or through a coalition of rural health stakeholders who, together, are able to articulate a clear and compelling agenda. 

Beyond having a clear agenda and the leadership behind that agenda, it is also critical for states to have a critical mass of resources needed to move that agenda forward. Here we see a dilemma that many states face in the Flex Program: how much of the resources of the Flex Program should be used to support state-level planning and technical assistance functions and how much should be directed to local hospitals and communities for community health improvement initiatives? The answer to this dilemma, of course, is that both are needed. In many states, the current funding levels in the Flex Program are not sufficient to achieve balanced investments in both of these areas.

Although we are only two years into the current program, we are already beginning to see an important evolution of state priorities and activities. States that have mastered the hospital conversion process are turning greater attention to the more ambitious "second generation" goals of the Flex Program of promoting and building sustainable rural community health systems. The experiences of these states deserve careful consideration as federal and state policymakers consider priorities for the future of the Flex Program.

Aligning Federal and State Goals and Program Strategies 

In our report last year, we noted that the majority of states we visited were measuring success in the Flex Program by the number of CAH conversions. This was to be expected given the press of managing the first wave of conversions in most states. We questioned, however, whether and to what degree the goals beyond hospital conversion, including rural health network and infrastructure development, would receive the same attention as the conversion process. 

As we have noted in this chapter, an answer to this question is beginning to emerge. States have begun to shift their attention to new priorities and strategies beyond promoting and supporting hospital conversions. These priorities were variously described as "helping hospitals and community health systems become sustainable," "improving the performance (or quality) of rural hospitals and other providers," and "addressing rural community health needs." However these priorities are described, they speak to the underlying goals in the Flex Program of helping to stabilize and build an appropriate and sustainable rural health system. The "early adopter" states are pioneering the vision and strategies for defining what constitutes a "sustainable, appropriate rural health system." The lessons of these states can and should be used to set the future goals, direction, and strategies of the Flex Program. 

The incentives and resources of the Flex Program could be clarified and strengthened to help states and communities move toward this larger vision for rural health improvement. As a predominately hospital-focused initiative, the program's incentives for broader community-based rural health system development are limited. Although states and hospitals are undertaking a variety of interesting and important rural health improvement initiatives using Flex grant funding, these tend to be small and localized. 

States (and their community and rural health provider partners) will certainly need greater resources to address their rural health development needs more systematically or comprehensively. Most importantly, however, those resources need to be tied to a broader set of rural health development goals. Those goals might focus on strengthening the rural health safety net for vulnerable populations, enhancing appropriate service capacity in rural communities, and/or improving the performance of rural health systems. Goals such as these would dovetail very nicely with the criteria many states are using to designate CAHs as essential hospitals. In addition, as suggested by the example of North Carolina, program strategies such as technical assistance and Flex grants could be targeted more explicitly to activities and initiatives that aim to help hospitals, other rural health providers, and rural communities achieve these goals. 

Program Focus: Hospitals and Communities 

As state priorities evolve toward greater attention to community rural health improvement, the potential tension between the hospital focus of the Flex Program and broader community health system development may become more significant. The prevailing vision behind the current Flex Program is that through CAH conversion, small rural hospitals will shift their orientation and service base to become community health service institutions. While there are clear examples of where this has happened, there are also many examples where hospitals have been exclusively focused on short-term survival needs and, understandably, have paid little attention to the community health system development priorities in the program. 

We are only two years into the Flex Program. Hence, more hospitals may turn their attention to these longer-term rural health systems development priorities if and when their financial conditions stabilize. As the Flex Program evolves, it is important that financial and other incentives and support resources be more explicitly targeted to broaden the rural health development priorities, if hospitals and other community health care providers are to be encouraged to move beyond short-term hospital survival concerns to address the broader community health needs of their communities and regions.

Chapter 2: A Profile of Critical Access Hospitals

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Footnotes

¹ The location of responsibility for implementation of the Flex Program varies among the states. In the majority of states, the state office of rural health, located in state government, is the implementing agency. In a subset of states, the state office is housed outside of state government (e.g. in a university) and implementation responsibility is shared with state agencies. In a few states, like Wisconsin and Montana, the state’s health facility licensure and certification agency is responsible for implementing the Flex Program. 

² In addition to the Flex grant, states also receive federal support from the State Office of Rural Health Program. Appropriations for this program have been increased recently and may contribute to helping states continue to address a broader array of rural health planning and technical assistance needs.

³ The total number of states with Medicaid cost-based reimbursement has changed since the writing of this report; for the most current information on Medicaid cost-based reimbursement and the states, please refer to the Tracking Team’s Web site: http://www.rupri.org/rhfp-track/.

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