Facilitating Change. Preserving Access.

White Paper: Rural Hospital Survival and Transformation

Statistics tell the story as to why access to key healthcare services is critical to maintaining the health status of a community.

Close to 93% of the residents in rural America have health insurance. Additionally, Medicaid accounts for less than 20% of the coverage for healthcare in towns of 4,000 residents and smaller. Over 10 million people 65 and older live in rural settings. Chronic health conditions (COPD, Diabetes, Arthritis, heart disease, obesity, circulatory problems) are more prevalent rural America.

With downward pressure on reimbursement, the costs of increased regulatory compliance, competition from larger healthcare providers, and the outmigration of rural residents to larger metropolitan areas in search of employment, the viability of rural hospitals, in the traditional sense, is under siege. Whether these hospitals have Critical Access designation or are traditional PPS facilities, their reliance on inpatient services to generate sufficient operating income, swing beds or not, is seriously challenged.

Early in my post-graduate academic life I learned from Dr. Alan Anderson, then CEO of Strong Memorial Hospital in Rochester, NY, that “if you can’t stand change, don’t consider healthcare as a profession”. Since that defining moment in the Fall of 1974, the pace of change in healthcare has been staggering. While most of the change in the 70s and 80s was technological, the reimbursement world was turned on its head with the advent of acute care PPS in 1984 and post-acute PPS in 1999.

These “tweaks” to the healthcare payment methodology for Medicare and Medicaid would quickly be adopted by commercial insurances and hospital inpatient days (stays) would plummet by more than 50% in the span of eighteen months. An appendectomy that had an average length of stay (ALOS) of 7.5 days in 1983 now is discharged the same day as the procedure or in less than 24 hours.
The above scenario is used to illustrate how impactful PPS has been on inpatient bed utilization. Many rural hospitals built in the Hill-Burton era (1950s), way before PPS, were an average of 80-120 acute beds. With one or two surgeons on staff and an active Emergency Department, the hospitals would have average occupancies in the 80-90 percent range. All of those hospital stays were paid on a per patient day (PPD) basis. In short, the hospital was successful predicated upon their ability to put “heads in a bed”.

Since the advent of PPS, having a “head in a bed” is an operational liability past a certain geometric mean length of stay (GMLOS) based upon the Diagnostic Related Grouping (DRG) in which the discharge diagnosis falls. Hence, that appendectomy that stayed 7.5 days in 1983 is now considered an ambulatory surgical procedure without complications, today.

As Dr. Anderson said, “If you can’t stand change, don’t consider healthcare as a profession.”
Most of the change in healthcare has been very positive; improving outcomes, quality of life, and providing interventions and cures for diseases that were terminal just a few years earlier. The flip side of this has resulted in a “power shift” away from individual healthcare providers to large hospital chains and third party insurance payors. CMS has further accentuated this shift with the creation of Managed Care Organizations (MCOs) for

Medicare and Medicaid beneficiaries to sign up with to manage their healthcare benefits. These MCOs are part of every large insurance company’s compendium of service offerings. For the providers, seeing decreasing reimbursement for procedures and inpatient stays, the only way to make up for these shortfalls was to increase procedural volume and ratchet down lengths of stay
In rural settings, this kind of operational flexibility was not possible due to the dearth of specialists and the lack of volume due to much less dense demographics than large, urban centers. Even with the advent of Critical Access Hospital (CAH) licensing options providing more flexibility for bed utilization and cost-based reimbursement than traditional PPS providers, the restrictions on ALOS and bed use may further truncate innovative programming options for CAHs in the future. Hence, the dilemma rural healthcare providers face and must adapt to for survival as some type of healthcare provider beyond 2020.

A typical Scenario:

Recent experience in a hospital in southeast Kentucky demonstrates what can happen when inadequate attention is paid to the metrics trending for rural facilities. In 2015, when the administrator of 41 year tenure decided to retire, the corporation had a positive fund balance north of $10 million. When we were brought into the picture in the Summer of 2019, the corporation was being forced into Chapter 7 bankruptcy by its major creditor for non-payment on millions of dollars in debt. How did we get here? Who was looking at the numbers? Why weren’t steps being taken to attempt to reverse course?

I call this a classic case of the “Death Spiral”. An iconic leader retires, the Board appoints a management company instead of taking on the often lengthy process of a protracted executive search with a search firm. The management company runs numerous CEOs in and out of the building. There is a lack of focus; a lack of concern. The management company is changed and the new management group is so caught up in revenue cycle management (RCM) details that the operations run into regulatory compliance issues and incur numerous Immediate Jeopardy (IJ) tags that are not resolved in the requisite timeframe due to a lack of cash and/or manpower. Thus, the CMS certification is pulled. Eighty-five percent (85%) of the revenue coming into the facility is from Medicare and Medicaid claims. That revenue is now gone. Classic death spiral!

Our Job 1 coming in was to reinstate CMS certification. The hospital had an active ER, 30 SNF beds, and a Rural Health Clinic designation that were key to its resurgence. We marshalled the political forces of Mitch McConnell, Hal Rogers, and the then Governor, Matt Bevin, to expedite a recertification survey as soon as humanly possible. The value of the hospital at auction was dependent upon its ability to participate in Medicare and Medicaid. Our job, at that point, was to maximize value for the secured creditors. This is why the trustee brought us in.

After several meetings with local officials, physicians, and representatives from the bank and the Court, it was clear that the hope was to maintain as many services as possible for the community. It was also clear from talking to ER docs and hospital staff that other, acute care services may be in high demand as well. Our primary focus was getting other healthcare providers in the region to become active in the review and bidding process to maximize return but also bring another owner/operator in to continue to manage the facility and provide services.

Our efforts to attract local and/or regional providers fell on deaf ears as it was clear that healthcare systems in the area were just waiting to “pick the bones” of the facility to be auctioned. With a seasoned and committed Director of Nursing still at the hospital, we set a course for correcting the IJ deficiencies and were able to get the

Mayor and City Council to allocate $500,000.00 to the hospital to be able to continue to make payroll for key staff and the ER physician group for the time it would take to re-establish certification. All other services were shuttered during this time and the ER claims were put into pending status.

The start of the recertification survey began one day before the “forced” auction of the physical assets of the hospital, August 8, 2019, after we begged for an extension to provide for a minimal due diligence period for prospective buyers. With the promise of CMS reinstatement, we received a bid of $7 million which was more than twice the total indebtedness. In time, that bid fell through when the bidder’s deposit never arrived. This forced the hand of the bank to enter a credit bid with the City which was eventually accepted by the Court.

During the time it took to get the bidding process completed and accepted, the State finished its recertification survey and submitted the result to CMS for review. With the political backing available to the hospital, its CMS certification letter and number arrived in late September. Claims were processed, cash received, operations re- established with a new management group and about 10 beds were staffed, initially. The RHC reopened for ambulatory care and as of this writing, the skilled nursing unit has not reopened. It should also be noted that the State never withdrew any licenses during the restructuring period.

It would be foolish to say that this is a total success story and the hospital is “out of the woods”. It will be necessary for the leadership to be diligent and looking for ways to re-imagine the hospital’s role in the community. When we met with them, we encouraged them to look at non-traditional programming that may complement their service compendium and generate revenue. Two ideal programs for the area would be in Addiction Medicine Detox and Gero-psych. Both are acute care programs that could use licensed bed capacity and both require the services of a psychiatrist which may generate enough volume to support their practice.

The discussion hasn’t gotten to the point of looking for or creating an ACO or efforts to develop Population Health Management services with local business and industry. However, this should be a focus for them down the road even if it means a partnership with previous and/or current competitors.

Traditional rural health providers must innovate and reimagine themselves at an ever-increasing rate or be subject to insolvency and potential service reductions or closure. Numbers do not lie and positive bottom-lines and balance sheets do not portend a rosy future. Healthcare delivery is constantly changing. The reality is…it must change! Our economy and competitiveness on the world stage is dependent upon the healthcare system’s ability to positively impact our nation’s health status indexes without breaking the bank at the same time. At 18% of US GDP and climbing, healthcare cannot be sustained at this level in perpetuity.

At the same time, without access to healthcare services, particularly in an emergency, the best health care and health insurance in the world is worthless! And, while prevention and early intervention are the most cost- effective care modalities, time to diagnosis and treatment will still remain the difference in morbidity and mortality.

This paper is the work product of James H. Wesp, Principal, Oasis, LLC. Any use or reproduction of this text is forbidden without the expressed written consent of the author.