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Rural Hospital Flexibility Program Tracking Project Conclusions from Year 02 Tracking Team Members from All Six Collaborating Centers
Preliminary results show participating hospitals are enjoying better cash flows as a result of participating in the program. To the extent that these financial results are attributable to program participation, the program may cautiously be credited with stabilizing many small rural hospitals and thus contributing to access to health care for many rural Americans.i The goals of the Flex Program extend beyond converting hospitals to critical access hospital status. Broader goals include state rural health plan refinement and implementation, emergency medical services (EMS) system improvement, and network development and quality of care. In this way, the program transcends a hospital conversion focus to address the challenge of strengthening health delivery systems. We found that states actively participating in the program for two or three years are now focusing more on these "second generation"ii issues. Despite these preliminary successes, the Flex Program faces some challenges, and the pace of implementation varies significantly across the states. Continuing problems include Medicaid and Indian Health Service (IHS) reimbursement, swing bed requirements, and barriers to conversion.iii Chronic rural hospital problems are layered on top of these conversion-related problems, and include the need for capital improvements to many aging hospitals and the need to recruit and retain a skilled workforce. Early problems related to hospital conversion, such as confusion over Medicare fiscal intermediary payment and unclear conditions of participation, seem to have been mostly resolved by this second year of the program. Resolution of the laboratory reimbursement methodology confusion in the federal BIPA (Benefits Improvement and Protection Act) 2000 legislation was an important milestone in the program.
Many states, and especially those that have mastered the hospital conversion process, are looking beyond hospital conversions to address a set of second generation challenges of strengthening the rural health infrastructure. These challenges include assisting hospitals to develop new quality improvement strategies; enhancing state and local EMS capacity; encouraging rural health networks; helping hospitals and communities build an appropriate continuum of primary, specialty, acute and long-term care services; and beginning to address the capital needs of hospitals and other rural health providers. However, other states that are early in their Flex Program experience are still grappling with the more basic structural and CAH conversion-related issues. Tracking the evolving state role in the implementation of the Flex Program over the last two years, we have identified several issues that merit attention:
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. The majority of states have developed criteria to enable rural hospitals that do not meet the federal 35-mile distance requirement to qualify for CAH conversion by designating them as "necessary" providers. These criteria generally involve some standard(s) of demographic, health, or economic hardship. Policy makers currently have little information concerning the actual role that CAHs are playing as rural safety net providers. 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.
The Flex Program has given many participating rural hospitals some financial breathing room, increasing their opportunities to diversify services and meet local population needs. We found that few CAHs are downsizing, though they may be de-licensing some beds. Typically, any expansions are occurring within existing departments, particularly specialty clinics, outpatient surgery, radiology and laboratory. Network affiliations appear to be facilitating these expansions. We have seen very few cases of hospitals expanding into brand new service areas following conversion. Hospitals converting to CAH status more recently have tended to have more beds prior to conversion, and to have a broader range of services.
The Flex Program has fostered significant network development between CAHs and larger hospitals in nearby communities. These networks seem to have contributed to reported expansions of scopes of services (especially the operation of occasional specialty clinics in rural communities) and to increased activity aimed at improving quality of hospital care. Most hospitals met only the minimal requirements of hospital-to-hospital networking between communities, but there were a number of places where providers were extending their efforts to include a variety of health and human services organizations in their own communities. These within-community vertical networks have helped reduce duplication of services and better use scarce resources, and states might be wise to explore opportunities to encourage more of these relationships.
Hospital administrators told us in our survey that cost-based reimbursement has brought them some financial stability but has not necessarily brought their hospitals into profitability. Half of the hospital administrators responding to the telephone survey reported a net loss of $200,000 or worse during the year prior to conversion. The median expected increase in Medicare payments reported by these respondents, however, was $193,500 in the year of conversion, rising to $250,000 (over expected payments without CAH conversion) by the second year. An analysis of cost reports shows that total margins in small rural hospitals have declined steadily since 1996, and CAHs were likely to do slightly worse than their non-CAH peers through 1999. At the time this study was conducted, data for fiscal periods ending in 2000 were available for only 13 percent of all rural hospitals. Preliminary analyses may, however, be pointing to a turnaround. CAHs seem to be breaking even or better, while other small rural hospitals show increasing losses. In 2000, CAHs are also showing more days of cash on hand, slightly better cash relative to total debt, and a smaller deduction percentage.
Quality of care improvement in critical access hospitals is one of the five central goals of the Flex Program. We anticipated that states and CAHs initially would focus on other components of the program (e.g., CAH designation, network development) before using their resources to address the more complex quality-of-care issues. We found, however, there was substantial interest in and use of quality assurance/quality improvement (QA/QI) activities despite the short time since conversion and the limited number of CAHs that are accredited by the Joint Commission on the Accreditation of Healthcare Organizations (JCAHO). Network relationships with affiliate or support hospitals stimulated new quality activities in the CAHs. The timing of the Flex Program coincided with overall hospital industry efforts to reinvigorate quality activities, but unique rural health system issues require unique approaches. Our site visits identified several examples of valuable CAH linkages with peer review organizations (PROs) and state hospital associations that facilitated QA/QI activities.
CAH physicians and hospital administrators play critical roles in successfully implementing this program. Physician support for the CAH program is very high, with many physicians who responded to our survey attributing new stability and image improvements to CAH conversion. Administrators are equally enthusiastic. Policy makers may be justifiably concerned, however, about the high rate of administrator turnover (the typical CAH had two administrators in the last five years), and may want to consider programs to strengthen and improve rural hospital governance and administration.
The second year of Flex Program grants has brought increased attention to rural EMS initiatives and, in many states, is fostering stronger working relationships between the state office of EMS and other state bureaus. In some states, new working relationships have also been forged at the local level between EMS interests, hospitals, and other local stakeholders, further strengthening the rural health care infrastructure. States are implementing a wide range of EMS programs, including training, needs assessments, data systems, and equipment purchases. Efforts to involve all key players from the very early stages, and to build consensus for common goals, appear to be very important to the successful design and implementation of EMS initiatives. While it may not be realistic to expect sweeping improvements in time to inform the upcoming Flex Program reauthorization decision, the next year will be critical as states continue to develop substantial EMS improvement projects and document their early successes.
CAHs have varied approaches to working with their communities to identify and address population health needs. The precarious financial status of many CAHs has consumed the attention of administrators and boards during the early years of CAH operation. With the increased stability provided by cost-based reimbursement and the various grants offered by the states through the Flex Program, however, we anticipate that many CAHs may soon be more systematically and frequently engaging in community development activities. Policy makers may want to consider supporting the development of programs to orient state offices and hospital administrators to the various community development models available. Follow-up technical assistance during implementation would also be useful.
America's small rural hospitals have largely benefited from the Flex Program, whether they converted to CAH status or not.iv There are, however, some continuing challenges for CAHs and the Flex Program, which include: The Number of Participating Hospitals: Some states seem to have a looser policy of including all eligible rural hospitals, while other states have more strict program entry requirements. This range of approaches leads to a variety of hospital profiles in the program. Capital Expansion: Many of America's small rural hospitals were built with the support of 1946-1970s era Hill-Burton Act funds. These facilities are collectively beginning to show their age and obsolescence. During the 1997-2000 period of the CAH program, participating hospitals' average age of plant was about 12 years, although a more desirable number is 9 or 10. Improved cash flow may allow participating hospitals to improve their facilities, but policy makers may want to consider whether cost reimbursement is the best vehicle for supporting capital improvements. Perhaps a directed capital program with more explicit rules and policies (and for which additional aging hospitals could qualify) would be a more straightforward approach. Medicaid and Indian Health Service: The lack of cost-based reimbursement from Medicaid is proving to be a barrier to CAH conversion in some states. Only 19 states v have implemented cost-based payment for CAHs under their Medicaid program. Payments from the Indian Health Service (IHS) are not cost-based. Enhanced Medicaid and IHS payments for inpatient and outpatient services could contribute significantly to improving the financial viability of many CAHs, especially those offering obstetric services. Swing Beds: The swing bed component of the CAH program allows small rural hospitals to move patients into skilled-nursing-facility type "swing beds." This provision benefits Medicare patients by avoiding transfers, and provides the hospital an opportunity to continue to serve these patients after discharge from an acute bed. The requirement that a 146-question Minimum Data Set (MDS) form (with multiple sub-questions) be completed for each of these patients was proving to be a significant burden; however, it was recently announced that CMS will now accept an abbreviated version of the MDS for swing beds. Additionally, some states require certificate of need applications for CAHs who did not already have these swing beds in place, delaying or stopping the hospital's conversion. Distinct Part Units: Another significant barrier to conversion-especially in the southern states-is the requirement that special inpatient care service unit beds be counted as part of the facility's total bed count. Those units-usually geriatric psychiatric or rehabilitation programs-often disqualify otherwise eligible small rural hospitals from CAH program participation (it makes their bed counts and-more importantly-lengths of stay too high). Ambulance Rules: Cost-based reimbursement for ambulance systems owned and operated by CAHs is available only if they are 35 miles from another ambulance system. This rule may need to be refined to account for special circumstances such as travel conditions and types of services being provided by competing ambulance providers. There are cases where hospital-owned ambulance systems cannot meet the mileage requirement and are therefore at risk of financial failure. This provision may also be a deterrent to CAH acquisition of local ambulance services, since any new entrant could jeopardize cost-based reimbursement. Exceptions to the mileage requirement, however, would need to be tightly crafted to create the intended policy effects. Workforce: A chronic and critical problem facing rural hospitals is the recruitment and retention of nurses, technicians, midlevel practitioners, and physicians. Our site visits confirmed that conversion to CAH status is not a cure for this problem, although increased cash flow has allowed CAHs to pay more competitive wages. Meaningful Networks: There are incentives in the CAH program for hospitals to create relationships with hospitals in other communities to facilitate patient transfers and referrals, support QA/QI activities, share the burdens of administration, enhance purchasing power, and bring specialists to rural communities. Movement toward integrating health systems vertically within communities, however, has not taken place in most communities. As this was not an explicit policy goal of the Flex Program, there are no explicit incentives to bring together hospitals, nursing homes, ambulances, or mental health services into more efficient delivery systems within single communities. As CAHs mature, the need for and likelihood of vertical linkages could increase. Likewise, current linkages between CAHs and their referral hospitals could be strengthened in many ways as the network relationship matures. There has been remarkable progress in the Flex Program to date. Conversion to Critical Access Hospital status seems to have helped over 400 hospitals improve financial performance, address quality issues, and network with other hospitals. States are also making progress on improvements to their rural EMS systems. However, America's small rural hospitals still face many significant challenges to their survival. Footnotes / References i The Medicare Payment Advisory Commission, in its June, 2001, "Report to the Congress: Medicare in Rural America," concludes: "The program has played a valuable role in maintaining access to care for Medicare beneficiaries, and appears to have actually improved access to care." ii States had predictable patterns during the conversion phase of the program, but this next phase of the Flex Program involves more complex activities aimed at tackling the other goals of the program. We are calling this next phase the "second generation." iii Examples of these barriers include distinct-part (usually psychiatric) units in some small rural hospitals that put them over the bed size limit, or a small number of state offices of rural health that do not have the capacity to assist hospitals with conversion to the extent needed. iv Eligible hospitals are conducting financial feasibility studies, usually fully paid from Flex Program grants, that have the potential to improve financial strategies even if the hospital does not convert. Additionally, some eligible hospitals are participating in EMS improvement activities, sending staff to statewide CAH meetings, and engaging their boards and communities in explicit discussions about hospital roles, scope of services, and missions. v 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/. 1 Institute of Medicine. Crossing the Quality Chasm: A New Health System for the 21st Century. National Academy of Sciences, 2000. 2 Zismer D, & Hoffman D. A 10-Point Strategic Checklist for Rural Health Care Systems. Journal of Rural Health. Winter 1995, 11:1, 53-59. RHFP
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