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Rural Hospital Flexibility Program Tracking Project

Chapter 6
Small Rural Hospitals that Have Chosen 
Not to Convert to CAH Status

Peter House, M.H.A., Debbie Duncan, and Amy Hagopian, M.H.A.
WWAMI Rural Health Research Center, University of Washington

Introduction

This chapter concerns hospitals that, despite appearing to be eligible for conversion to critical access hospital (CAH) status, have decided to decline the opportunity. Amidst the enthusiasm for conversion and the determined efforts in many states to help all eligible rural hospitals to convert, there remain factors that have resulted in significant numbers of small rural hospitals retaining their current licensure status. In this chapter, we explore the reasons for non-conversion and make some conclusions concerning the decision of some hospitals not to change to CAH licensure status. Given the apparent substantial financial benefits from conversion, the question is whether non-converters are choosing the status quo because of barriers, such as lack of information and program complexity, or because the program's features are not sufficiently advantageous to justify a change. As the Flex Program matures, we need to better understand how hospitals are making this important decision.

Methodology and Approach

Our methodology had two main aspects. First, we looked at information from the national survey of state Flex Program coordinators conducted by the University of North Carolina (UNC) as part of this national Tracking Project. Flex Program coordinators in all 47 participating states were surveyed via telephone between October 2000 and April 2001. During some of these conversations, hospitals were identified that had decided not to convert to CAH status at that time, and, in some cases, the coordinators had information about why conversion had not taken place. Of the many hundred hospitals that were identified as CAH-eligible but that had not converted, 85 were identified by state coordinators as facilities that would likely not convert to CAH status. It is important to note that the total number of non-converters is believed to be greater than 85. Contacts declined to discuss the reason(s) for 28 hospitals' decisions not to convert to CAH.

Second, University of Washington (UW) staff conducted a series of telephone interviews with administrators of non-converting hospitals. While we know that there are non-converting hospitals in every state, we concentrated our interviewing in those states we had visited in our first-year site visits, along with other hospitals in states slow to embrace the Flex Program [as identified by the Technical Assistance Service Center (TASC) and members of the Tracking Team]. TASC's purpose is to provide help to state offices of rural health with the administration of the Flex Program. On occasion, TASC will work directly with rural hospitals on issues pertaining to the Flex Program. We used a survey guide with both open- and closed-ended interview questions.

Findings

Figure 1 summarizes the primary explanations for non-converting hospitals, as reported by state Flex Program coordinators in telephone interviews with our UNC partner. 

In Figure 1, the reasons for not converting have been collapsed into five major headings:

• Financial - includes reasons relating to the negative effects of converting on the financial performance of the hospital.

• Distinct Part - refers to hospitals that would have to close distinct part units (DPUs) in order to qualify for CAH status because of regulations on bed size limit, which currently include DPU beds in the 25-bed limit. This is a special case of the next category, size.

• Size - includes reasons relating to hospitals that have too many beds and/or average lengths of stay beyond what is allowed of CAHs. 

• Opposition - refers to problems relating to individuals or groups in the community expressing opposition to conversion.

• Other - all other reasons.

Many of the reasons for non-conversion cited in the UNC survey were also found in the UW survey and are discussed in more depth below.

We began by working with state-level Flex Program officials to develop lists of hospitals that had not converted to CAH status. We found some of the hospitals identified by our contacts had actually decided to convert or were in the process of converting by the time we contacted them. As appropriate, we included information about these hospitals as it pertained to the issues hospitals consider when making the decision whether to convert to CAH status. Similarly, we also talked with some hospitals that were thought by their state coordinators to be eligible, but in fact were not eligible for CAH conversion because of size-related eligibility rules, a barrier that they could overcome only with significant downsizing. Table 1 contains summary information about the hospitals we contacted.

Table 1.  Hospitals Contacted for Non-Conversion Interviews

Our hospital telephone survey was conducted using a semi-structured interview guide. Responses to the questions were categorized and are summarized in the following paragraphs. It is important to keep in mind that the information presented here is based on the opinions and perceptions of the interviewed hospital administrators; we have not verified reported events or details shared by these respondents. In fact, some administrators may have a poor understanding of the Flex Program and others may have withheld information for political reasons. Nevertheless, we believe that the administrators' observations are important to the overall success of the Tracking Project and that the information gathered can help inform policy makers and other hospital administrators considering CAH conversion. The hospital administrators reported the following reasons for not converting to CAH status:

Financial Issues

Most hospitals view the Flex Program, first and foremost, as a way for small rural hospitals to improve their financial performance. If this expected outcome cannot be demonstrated, the hospital is not likely to convert.

• Inconsistent Consultant Reports:  Many non-converter hospitals had more than one financial feasibility study that resulted in conflicting recommendations. In the early days of the CAH program, there were a number of consultants who were skeptical about the financial benefit of CAH status. Many administrators believed that bed size concessions limited their hospital's income potential and were reluctant to downsize given the uncertainty regarding benefits of the new CAH reimbursement method. Some hospitals and their consultants were cautious and resistant to change. The uncertainties around the phase-in of some aspects of the 1997 Balanced Budget Act (e.g., outpatient reimbursement) also dampened enthusiasm for the program. Financial feasibility studies are generally limited in their ability to forecast future developments in the facility being studied. These factors have often led to confusion about the bottom-line results of converting.

• Profitability of DRGs:  Some of the non-converting hospitals were doing fine under the prospective payment system (PPS). Forty-seven percent of the hospitals we contacted described themselves as profitable. These hospitals have done a good job keeping costs very low, and as a result, the payments for their most common diagnosis-related groups (DRGs) were, in fact, above their costs. One administrator told us his hospital has always had a high Medicare caseload and his staff has become very skilled at managing patients and providing quality care within the cost boundaries set by DRGs. Additionally, many rural hospitals pay very low wages, often under the pressure of a tight Medicare wage index, and many have avoided the costs of debt service by falling behind on capital maintenance. These low costs may be artificially depressed and may not be sustainable in the long run, something that could lead these hospitals to consider CAH conversion in the future.

Hospitals profitable under the prospective payment system have managed to take advantage of being paid an industry average that exceeds their institutions' costs on a sufficient number of inpatient DRGs. On the other hand, many hospitals have yet to figure out a way to be profitable under outpatient prospective payment. A hospital in Nebraska has recruited two surgeons since converting to CAH status, and may want to convert back now that inpatient volumes are rising and DRG reimbursement may exceed allowable costs.

Indeed, it does not appear wise for some hospitals to switch from PPS to cost-based reimbursement (CBR), though we have reservations about some of the administrators' reasoning as reported. For example, in some states Medicaid is paying some hospitals at cost for inpatient cases, an improvement for the hospital's overall financial performance. However, if cost-accounting is not highly accurate, hospitals may find that enhanced Medicaid reimbursement is actually masking losses incurred by DRG reimbursement on Medicare. Additionally, we suspect that some administrators may be poorly informed and that some facilities are actually losing money on Medicare overall, even though finances look good on the inpatient side. Given that the financial feasibility studies have had such variable results, it is likely that some of the analyses have been erroneous.

There is one more consideration with regard to weighing the pros and cons of conversion for hospitals currently profitable under DRGs. Administrators indicated that Medicare is continually tightening DRG weights in order to ratchet down overall expenditures on hospital care for beneficiaries. Even if a hospital is currently profitable under the prospective payment system, and if it already looks and acts like a CAH, some consultants are advising that the hospital convert. They argue that conversion should occur while cost-based reimbursement is available and it is still early enough in the program to learn how to get good at it before those rules start to ratchet down payments, as well.

• Low Debt Service: Studies of the feasibility of CAH conversion for hospitals with low debt service may show little gain (or even a loss) from conversion. Low debt service can therefore become another reason for not converting. As it turns out, a key benefit of conversion is that Medicare's portion of capital costs are reimbursable at cost. For hospitals that gain marginally (and with lack of certainty) on operations from CAH conversion, the benefits of capital cost reimbursement may be what make the change worthwhile. Alternatively, if a hospital 1) has a low percentage of Medicare patients, 2) is located in a state that does not reimburse CAHs at cost under Medicaid, and 3) has a low debt service, conversion may not be attractive to that hospital, even if capital improvements are planned.

• Sole Community Hospital Status: Many CAH-eligible hospitals are currently designated by Medicare as "Sole Community Hospitals" (SCHs) and already receive enhanced reimbursement benefits similar to those for CAHs. Some of the administrators at SCHs reported that consultants advised them against CAH conversion, because it would not be in their financial interest. In other cases, the difference between CAH and SCH status would be negligible, so there would be no compelling reason to make the change in status from one to the other. One issue for hospitals that have improved their efficiency in recent years is that they are paid on the basis of costs in the most recent year under the CAH program, while the SCH program pays on the basis of average costs for the past three years. 

• Problems with Fiscal Intermediaries (FIs): In some states, the fiscal intermediaries (FIs) have had difficulties handling this relatively new program. As such, payments to some CAHs have been wrong and/or delayed, and this situation has caused significant distress to these already-fragile hospitals. Although these types of problems are being resolved, the interim effects on a small hospital can be quite devastating since they have little cash on hand to support daily operations while the FI determines how to settle claims. Stories of these experiences have frightened some hospitals and influenced their decision not to convert to CAH status.

By way of illustration, we learned of one hospital that had to wait six to eight weeks for a new Medicare billing number following conversion, and in the interim, received no Medicare payments. The administrator said it was "…like tossing someone a lifeline with an anchor attached to it." 

Another hospital is getting paid charges while the FI figures out how to provide cost-based reimbursement. The CEO fears he may face a large (and potentially disastrous) payback at settlement time. 

Yet another hospital told us that its financial feasibility study showed a 12 percent gain under CAH conversion. When it converted and the financial gain did not materialize, administrators discovered that the problem was that the FI was incorrectly denying a specific billing code. The hospital persisted and ultimately the billing error was identified as a long-standing glitch in the national Medicare reimbursement system.

Not surprisingly, these stories have had the effect of instilling caution on the part of prospective converters.

Size

Some hospitals simply exceed the bed size limit allowed under CAH regulations. Many of these facilities feel they have a need for more beds than CAH rules allow: 15 acute plus 10 swing beds (actually, all 25 beds can be swing beds, but only 15 can be used for acute care at any one time). Although some of these hospitals experience very few days per year when they would need more than the allowed numbers of beds, they are unwilling to strictly limit their potential inpatient capacity in order to improve the financial performance of the institution. They feel that the changes they would have to make in order to convert to CAH status would compromise their missions of providing the care needed in their communities. Other hospitals are currently within the size limitations, but have reason to believe that utilization could grow and that they would quickly approach the upper bed size limit for CAHs. 

Distinct Part Units

Another complexity of the bed size limit for CAHs is the inclusion of distinct part unit (DPU) beds. For example, beds located in a facility's geriatric psychiatric unit must be counted toward the CAH bed limitations. In order to comply with the CAH bed size limit, these hospitals would have to drop their (usually very profitable) distinct part units, thereby rendering the decision to convert not feasible. 

Other hospitals look at their obstetrical (OB) services as de facto distinct part units because Medicare does not reimburse for those services. One hospital we visited, for instance, is not counting an OB patient's time in delivery or recovery rooms, or a newborn's time in the bassinet, against the 15-bed occupancy total. When the patient finishes delivering her baby, she becomes an inpatient again in a general or postpartum area and she again counts in the acute care bed limitation. The newborns are merely boarders and are not accounted for in the acute care bed limitation unless they are ill and actually require care from the staff. But this year, licensure staff were confused about whether this past practice was consistent with Medicare rules, and were starting to question whether the hospital can exempt observation beds or newborn beds from the limit of 15 acute care beds. This kind of confusion creates a barrier to smooth program implementation.

Local Opposition

While some interviewed hospital administrators declined to involve their communities and hospital staff in the decision to convert to CAH status, many made presentations and facilitated discussions at the governing board and medical staff levels. In some cases, the hospital's medical staff objected to conversion. However, none of the hospitals we talked to experienced opposition from the residents of the community. One hospital administrator opposed conversion on the grounds that it was "yet another unnecessary intrusion by the government into health care." Most of the medical staff objections concerned the potential reduction in scope of services. Besides potentially limiting physician practices, limiting services might cause a decrease in public confidence in the local hospital, which could result in a decrease in utilization and, ultimately, threaten the hospital's financial viability. As Chapter 3H points out, however, the vast majority of physicians affiliated with current CAHs are highly supportive of the conversion decision.

State Issues and Lack of State Support

Some hospitals report a lack of information and support from state program leaders, which has limited their knowledge and interest in CAH conversion. In some states, the Flex Program is well-organized and has sufficient experience, knowledge, and resources to help hospitals make a decision about CAH conversion. Other states have less experienced or sophisticated Flex Programs and, as a result, have provided less assistance to the rural hospitals considering CAH conversion. Many hospitals have not been supplied with information on rules about licensure, reimbursement, or capital costs, nor have they been given advice on issues such as how to restructure their services. In contrast, for example, Alaska and its office of rural health created a 20-page matrix that helped hospitals and others sort out the overlapping state and federal laws and responsibilities; this document has been useful to the state's hospitals. Such practical guidance is simply not available in many states, however. 

The lack of participation of some states' Medicaid programs is also responsible for some hospitals' decisions not to become CAHs. In 19 states ⁱ, CAHs are reimbursed at cost for their Medicaid patients. Many rural health advocates are working to convince their state legislatures to reach an agreement for enhanced Medicaid reimbursement. For hospitals that have a large proportion of Medicaid patientsⁱⁱ, cost-based reimbursement for Medicare provides little, if any, financial relief. For other hospitals, some financial feasibility studies have projected substantial gains for particular facilities if Medicaid claims were reimbursed at cost. Cooperation between state Flex Programs and Medicaid agencies is critical in the decision to convert to CAH status, and the inability to come to agreement on enhanced Medicaid reimbursement for CAHs has influenced some hospitals in their decisions not to convert. 

Cost of Code Upgrades

In some states, a change in licensure status would require plant upgrades to meet current building codes (e.g., sprinkler systems, automatic door closure, and air circulation systems). For some hospitals, the financial benefits of conversion would be offset significantly by the costs of updating facilities according to current building codes. Without conversion, these facilities are less likely to face these types of upgrades, even when the status quo does not meet current standards.

Larger Issues

While the Flex Program and CAH status have offered great benefits and been an important opportunity to improve overall financial performance for many rural hospitals, some facilities face more pressing and immediate issues. Consideration of CAH conversion is a substantial project, and some hospitals are simply too busy facing other crises to even consider conversion. For example, one hospital that we contacted had recently undergone a change in ownership that was causing distress in the community. Other hospitals are in such poor financial condition that marginal improvements in reimbursement (as anticipated from CAH conversion) will not be sufficient to save the hospital from closure. For these desperate hospitals, CAH conversion would only consume time and energy that is needed to develop alternative solutions for the hospitals' immediate problems.

Benefits to Non-Converters

We want to emphasize that many of the non-converting hospitals we contacted recognized that they had benefited from the Flex Program even though they have not yet converted and may never convert. States have used Flex Program funds to benefit non-converting hospitals as well as converting hospitals. Many states have made mini-grants to CAH-eligible hospitals for a wide variety of projects. Some of these grants have funded activities directly related to exploring CAH conversion (e.g. community assessments) while others have funded equipment purchases. States have also used Flex Program funds for statewide programs that benefit all rural hospitals, not just those converting, such as statewide emergency or quality of care systems and the development of state rural health plans.

The periodic, ongoing e-mail survey of the Flex Program coordinators conducted by UNC shows that, as of the beginning of May 2001, nearly 700 hospitals have received support through their states' Flex Programs (i.e., financial or other substantive support). These hospitals include facilities that have been certified as CAHs, hospitals that are considering conversion, and hospitals that have declined to convert at this time. Given that there are approximately 400 CAHs now, that indicates that an additional 300 facilities (non-CAHs) have benefited from the Flex Program. This number increases every month.

Conclusions 

Our study of non-converters yields three overriding conclusions:

Reason Prevails:  With very few exceptions, it is our opinion that hospitals have made their conversion decision after rational and thoughtful study of the issue. All of the hospitals we talked with had gone through financial feasibility studies and weighed the financial pros and cons of conversion. 

Non-Converters Benefit from Flex:  Most rural hospitals have benefited from the Flex Program, even if they have decided not to convert at this time. States have used their federal grant funds to make mini-grants to hospitals for targeted activities like financial feasibility studies and community assessments. In some states, rural hospitals have even received grants for equipment purchases or improvements to hospital management systems. In addition, hospitals stand to benefit from the study of and improvements to statewide planning, network formation, and emergency medical services.

Critical Access Hospital Status Is Not the Best Path for All Hospitals: Early in the Flex Program, state Flex grantees compiled lists of hospitals that appeared to be eligible for CAH conversion. States used different criteria to identify their potentially eligible hospitals, and some lists included hospitals that were only marginally likely to convert. Because the program offered cost-based reimbursement that would (presumably) bolster the hospitals' financial performance, the assumption was that all qualifying hospitals should convert to CAH status. Our analysis has shown, however, that the CAH program does not necessarily offer benefits to all eligible hospitals; therefore many facilities should not convert.

We suspect that many small rural hospitals will not convert to CAH status. Conversion will remain an opportunity that works for some small rural hospitals and not for others. In all likelihood, some converters will drop CAH status as their operations change, and some non-converters may later make the decision to convert to CAH status if they find evidence that conversion would be in their best interest. Changes contained in the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA) may provide new incentives for some facilities to convert to CAH status. As such, federal policy makers should keep in mind that this program will remain a targeted opportunity and that not all rural hospitals will choose to convert.

Conclusions from Year 02

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Footnotes / References

ⁱ 17 states plus California provide inpatient Medicaid reimbursement, and 17 states plus Minnesota provide outpatient Medicaid reimbursement.

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

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