Will small hospitals disappear?

Facilities take new approaches to survive familiar challenges.


As hospitals and health systems consolidate into ever-bigger entities, many small hospitals are left on the outside, and often in the red. The recent shuttering of dozens of small facilities—as well as the at-risk status of hundreds more—is the result of recurring problems in a shifting health care landscape, such as major federal reimbursement cuts and recruitment issues.

Possible solutions, such as partnerships with larger systems or targeted government funding, may help small hospitals persevere. But given that some small hospitals in rural areas are the only facility of the kind for many miles, their potential demise could impact health care access.

Illustration by Sarah Ferone
Illustration by Sarah Ferone

“What gets forgotten is the important services that these hospitals are providing to their communities,” said Priya Bathija, senior associate director of policy for the American Hospital Association (AHA). “And it's not just [emergency department] services, but it's primary care services, it's physician services. It's ensuring that those populations remain healthy.”

Reimbursement cuts

Over the last several years, a series of significant cuts to health care reimbursement have severely impacted small rural hospitals, said Brock Slabach, MPH, senior vice president for member services at the National Rural Health Association (NRHA). These changes are particularly deleterious because these hospitals have both lower volumes and a higher dependency on government payers, he said.

“The single most important payment policy that has basically moved several hundred hospitals from the black, in terms of operation, to the red has been sequestration,” Mr. Slabach said. “That was a 2% reduction in all Medicare payments to providers, regardless of their circumstances. That was implemented as part of a budget agreement 3 or 4 years ago, and the cumulative effect of that has been to seriously impair many rural hospital operations.”

Another important payment change came in 2012, when Medicare began reimbursing only 65% of hospitals' bad debts compared to 70% previously. This had an even greater effect on certain entities, such as critical access hospitals (CAHs) and federally qualified rural health clinics, which had previously gotten 100% of bad debts reimbursed.

As the focus in health care shifts from volume to quality, the increased oversight on utilization management and unnecessary testing also puts a burden on small hospitals with limited volumes because of the higher-percentage impact, according to Charles Marley, DO, vice president of medical affairs at the 76-bed WellSpan Gettysburg Hospital in Gettysburg, Pa.

“It's caused a slight decrease in the number of MRIs that we do. . . . It's a reasonable and safer alternative, but those things also decrease revenue, and in a hospital, surgeries and ancillary [imaging] studies are the largest source of revenue,” he said.

Rural pains

Since 2010, 57 hospitals in rural areas have closed—a recent example is 10-bed Nye Regional Medical Center in Tonopah, Nev. The hospital, which also provided laboratory, radiology, respiratory, and outpatient services, was 100 miles away from the nearest hospital. “So the folks in that community will have to travel that distance now to receive any health care,” Mr. Slabach said. In addition, the NRHA estimates that 283 of roughly 2,000 rural hospitals in the U.S. are at risk of closure.

The difficulties facing small, rural hospitals have been apparent for decades. In the 1990s, CMS created Essential Access Community Hospitals and Rural Primary Care Hospitals through the EACH/RPCH program as a way to address the closing of many hospitals in small towns and find a sustainable model. Out of this program came CAHs, which have 25 or fewer beds and are located more than 35 miles from another hospital.

CAHs are paid on a cost-based reimbursement from Medicare instead of diagnosis-related groups, and they receive 101% of costs, minus 2% sequestration. “But even with that, still close to half of our critical access hospitals still operate in the red, and that's because they have such a small volume of patients,” said Michelle Mills, CEO of the Colorado Rural Health Center.

At least in Colorado, beds at CAHs rarely get up to full capacity, according to Ms. Mills. “They're definitely not full,” she said. “I think the average census is 2 or 3.” Despite operating in the red, some CAHs own and operate outpatient federally certified rural health clinics, which generate much of their revenue, Ms. Mills said.

No small hospitals in Colorado have closed, but a large number have closed in parts of the southern U.S., where Medicaid wasn't expanded under the Affordable Care Act, Ms. Mills said. “We've been fortunate in Colorado that we've expanded Medicaid, so that has allowed for both our hospitals and rural health clinics to collect some money for those patients that they normally wouldn't have collected because the bad debt reimbursement is also going down,” she said.

EHR adoption

Electronic health records (EHRs) pose another challenge, as small and rural hospitals are subject to the same meaningful use requirements as larger facilities, as well as the considerable financial cost associated with adoption of these systems.

“They face a lot of problems, including economies of scale and having the cost spread out over their volume of patients and services that they provide,” said Ms. Bathija. “In addition, they face challenges attracting vendors because they are such small providers. They often also have a hard time absorbing any sort of increased costs that vendors may have due to [needing] interoperability of various systems that [the hospitals] have in place already.”

Small and rural hospitals continue to lag behind their better-resourced counterparts when it comes to EHR adoption, according to a study in the December 2015 issue of Health Affairs. “Our findings suggest that nationwide hospital EHR adoption is in reach but will require attention to small and rural hospitals and strategies to address financial challenges, particularly now that penalties for lack of adoption have begun,” the study's authors wrote.

Of the studied under-100-bed hospitals, 28.9% had a comprehensive EHR, 40.8% had a basic EHR, and 30.3% had a less-than-basic EHR, according to the analysis of 2014 data. Medium hospitals had higher rates of comprehensive and basic EHR adoption, at 36.5% and 42.9%, respectively. Among large hospitals, 49.9% had comprehensive EHRs, and 35.3% had basic EHRs. Compared to small hospitals, medium and large hospitals had lower rates of having an EHR with less-than-basic capabilities (20.6% for medium, 14.7% for large).

Even if small hospitals have implemented EHRs, they face additional related challenges in the future. “The problem that we see going forward is how these rural facilities that have invested quite a bit in these technologies are going to be able to afford the total cost of ownership,” said Mr. Slabach. “As hospitals become more fragile through the [reimbursement] cuts, and there's the waning now of incentive money that was produced by the American Recovery and Reinvestment Act, we're very concerned that the ability to keep these systems updated and current could be threatened.”

Possible solutions

Some small hospitals have chosen to join larger health systems in an effort to stay afloat. Being part of WellSpan Health, a large integrated health system, helps Gettysburg Hospital by increasing the capital expenditure dollars available, as well as giving the hospital a direct link to subspecialty services it might not otherwise be able to afford, Dr. Marley said. For example, a telestroke program virtually connects with a telestroke neurologist from WellSpan York Hospital to help guide care for the Gettysburg stroke team.

Another telemonitoring program involves a York Hospital intensivist, who virtually rounds with a nurse practitioner in Gettysburg's intensive care unit. “It brings a higher level of care because currently, our hospitalists are our intensivists—we don't have any intensivists locally,” Dr. Marley said. “It will likely reduce transfers to York Hospital because York is routinely full, and every time we transfer a patient at Gettysburg that should be able to be managed here, we take a bed away from the York community.”

But this model doesn't work for every small hospital. Wayne Allen, former CEO of the now-shuttered Nye Regional Medical Center, wrote a letter at the time of the hospital's closure that noted failed efforts to arrange partnerships with other health care organizations. “These efforts have been unsuccessful due to our small size and remote location,” he wrote.

Another survival strategy for some small hospitals is to partner with other small facilities, rather than bigger groups. “We are also actually seeing a lot of these smaller hospitals look to each other to improve care in the health care services that they're providing to their communities,” Ms. Bathija said. “Probably the best example of that is the group of rural hospitals that are coming together to form [accountable care organizations] so that they can participate in those types of programs and have the volume necessary to succeed.” Small hospitals that partner together can also get benefits in negotiating the purchase of equipment, supplies, and even employee benefits together.

Some rural hospitals in dire financial situations receive support in the form of additional funding from the community or state and local government. The Save Rural Hospitals Act (HR 3225) was introduced this year in the House in an effort to stop the bleeding for rural hospitals. Its key features include reversing cuts to reimbursement and permanently extending the Medicare-Dependent Hospital and Low-Volume Hospital programs, Mr. Slabach said. A second piece of the legislation explores options for transforming rural hospitals that are having difficulty maintaining inpatient hospital services, he said.

Essentially, the bill would help keep the hospitals open as health care facilities offering 24/7 emergency care, without their inpatient beds. This would allow CAHs to “beef up their outpatient service offerings, so that way they are still able to maintain primary care services within the community without losing everything, even though you wouldn't necessarily be a traditional-looking hospital,” Ms. Mills said.

Legislative measures have helped to keep small hospitals in business thus far, but some health care experts don't expect that to continue far into the future. “It's going to get propped up to some extent, but I don't think the extent that it is now,” said hospitalist Bob Wachter, MD, FACP, speaking at the University of California San Francisco's Management of the Hospitalized Patient conference in October.

“We're entering a world that's going to be much more corporate and require much larger scale. . . . Eventually you just won't have stand-alone entities that small,” he said. “It saddens me.”

Although there is no one-size-fits-all solution for struggling hospitals, the concept of transforming their care delivery model is a step in the right direction, Ms. Bathija said. “I think that these hospitals are going to continue to survive in some form or fashion in order to maintain access to essential health care services for their communities,” she said. But more solutions are needed to ensure the viability of these hospitals, and the AHA's Task Force on Ensuring Access in Vulnerable Communities is evaluating other alternatives, Ms. Bathija said.