The Financial Performance of Rural Hospitals and Implications for Elimination of the Critical Access Hospital Program

Purpose: To compare the financial performance of rural hospitals with Medicare payment provisions to those paid under prospective payment and to estimate the financial consequences of elimination of the Critical Access Hospital (CAH) program. Methods: Financial data for 2004‐2010 were collected from the Healthcare Cost Reporting Information System (HCRIS) for rural hospitals. HCRIS data were used to calculate measures of the profitability, liquidity, capital structure, and financial strength of rural hospitals. Linear mixed models accounted for the method of Medicare reimbursement, time trends, hospital, and market characteristics. Simulations were used to estimate profitability of CAHs if they reverted to prospective payment. Findings: CAHs generally had lower unadjusted financial performance than other types of rural hospitals, but after adjustment for hospital characteristics, CAHs had generally higher financial performance. Conclusions: Special payment provisions by Medicare to rural hospitals are important determinants of financial performance. In particular, the financial condition of CAHs would be worse if they were paid under prospective payment.     

Adoption and perceived effectiveness of financial improvement strategies in critical access hospitals

Purpose: To ascertain the use and perceived success of strategies to improve the financial performance of Critical Access Hospitals (CAHs). Methods: Information about the use and perceived effectiveness of 44 specific strategies to improve financial performance was collected from an online survey of 291 CAH Chief Executive Officers and Chief Financial Officers. Responses were merged with financial and operational characteristics of the respondents’ hospitals obtained from Medicare cost reports. Use rates and perceived success and failure were calculated for each strategy. A cluster analysis was applied to classify strategies based on their use and success. Finally, CAH characteristics were examined to predict the use of individual strategies. Findings: Financial improvement strategies are pervasive among CAHs. The administrators who responded to the survey in this study reported using an average of 17.0 of the maximum 44 strategies listed in the survey questionnaire. Revenue/cost, human resource, and capital strategies were more frequently used than service expansion and reduction strategies. Overall, CAH characteristics did not explain the use or perceived success of specific strategies, but they did partially predict the number of strategies attempted. Conclusions: CAH administrators have used multiple strategies to improve financial performance with a wide variety of reported success. More research into the effectiveness of specific interventions is needed to help administrators select evidence‐based strategies.     

Variations in Financial Performance Among Peer Groups of Critical Access Hospitals

CONTEXT: Among the large number of hospitals with critical access hospital (CAH) designation, there is substantial variation in facility revenue as well as the number and types of services provided. If these variations have material effects on financial indicators, then performance comparisons among all CAHs are problematic. PURPOSE: To investigate whether indicators of financial performance and condition systematically vary among peer groups of CAHs. METHODS: Suggestions from CAH administrators, a literature review, expert panel advice, and statistical analysis were used to create peer groups based on whether a CAH: (1) had less than $5 million, $5-10 million, or over $10 million in net patient revenue; (2) was owned by a government entity; (3) provided long-term care; and (4) operated a provider-based Rural Health Clinic. FINDINGS: Significant differences in financial performance and condition exist among CAH peer groups. CONCLUSIONS: CAHs should ensure that they use appropriate peer comparators when assessing their financial performance and condition. If quality, outcome, safety and access are affected by financial performance and condition, it may also be important for research in these areas to control for peer group differences among CAHs.     

The Role of Critical Access Hospital Status in Mitigating the Effects of New Prospective Payment Systems Under Medicare

This article examines rural hospitals that potentially qualify as critical access hospitals (CAH) and identifies facilities at substantial financial risk as a result of Medicare's expansion of prospective payment systems (PPS) to nonacute settings. Using Health Care Financing Administration (HCFA) cost reports from the federal year ending Sept. 30, 1996, combined with county-level sociodemographic data from the Area Resource File (ARF), characteristics of potential CAHs were identified and their finances analyzed to determine whether they could benefit from the cost-based reimbursement rules applicable to CAH status. Rural hospitals were identified as potential CAHs if they met a combination of federal and state criteria for necessary providers. Rural facilities were classified as "at risk" if they had poor financial ratios in conjunction with high levels of dependence on outpatient, home-care or skilled nursing services. Almost 30 percent of all rural hospitals were identified as potential CAHs. Ninety percent of potential CAH facilities were identified as "at risk" by at least one of five possible risk criteria, and one-third were identified by at least three. Of those classified "at risk," 48 percent might not benefit from conversion to CAH because their inpatient Medicare reimbursement would likely be less under CAH payment rules than under their current PPS payment rules. Many potential CAHs were doing well under inpatient PPS because they were sole community hospitals (SCH) and were therefore eligible for special adjustments to the PPS rates. The Rural Hospital Flexibility Act would be more beneficial to the population of isolated rural hospitals if those eligible for both CAH and SCH status were given the option of retaining their SCH inpatient payment arrangements while still qualifying for outpatient cost-based reimbursement.     

Choosing to convert to critical access hospital status

The authors profile facilities converting to critical access hospitals (CAHs) from 1998-2000, comparing characteristics of their communities, operations, and finances to those of other small rural providers. Counties where CAHs are located are more sparsely populated, but do not have substantially different sociodemographic profiles than other rural counties. Converting hospitals' acute daily census averaged well below the statutory limit of 15, but over one-half reduced unused bed capacity to meet CAH size limitations. The average case-mix adjusted Medicare cost per case was 16-percent higher for CAH converters than for other small hospitals and their financial ratios were substantially worse, although many other operating characteristics were similar.     

Factors Associated with Iowa Rural Hospitals' Decision to Convert to Critical Access Hospital Status

ABSTRACT:  Context: The Balanced Budget Act (BBA) of 1997 allowed some rural hospitals meeting certain requirements to convert to Critical Access Hospitals (CAHs) and changed their Medicare reimbursement from prospective to cost-based. Some subsequent CAH-related laws reduced restrictions and increased payments, and the number of CAHs grew rapidly. Purpose: To examine factors related to hospitals' decisions to convert and time to CAH conversion. Methods: Eighty-nine rural hospitals in Iowa were characterized and observed from 1998 to 2005. Cox proportional hazards models were used to identify the determinants of time to CAH conversion. Findings: T-test and one-covariate Cox regression indicated that, in 1998, Iowa rural hospitals with more staffed beds, discharges, and acute inpatient days, higher operating margin, lower skilled swing bed days relative to acute days, and located in relatively high density counties were more likely to convert later or not convert before 2006. Multiple Cox regression with baseline covariates indicated that lower number of discharges and average length of stay (ALOS) were significant after controlling all other covariates. Conclusion: Iowa rural hospitals' decisions regarding CAH conversion were influenced by hospital size, financial condition, skilled swing bed days relative to acute days, length of stay, proportion of Medicare acute days, and geographic factors. Although financial concerns are often cited in surveys as the main reason for conversion, lower number of discharges and ALOS are the most prominent factors affecting rural hospitals' decision on when to convert.     

Financial performance monitoring of the technical efficiency of critical access hospitals: a data envelopment analysis and logistic regression modeling approach

From 1980 to 1999, rural designated hospitals closed at a disproportionally high rate. In response to this emergent threat to healthcare access in rural settings, the Balanced Budget Act of 1997 made provisions for the creation of a new rural hospital--the critical access hospital (CAH). The conversion to CAH and the associated cost-based reimbursement scheme significantly slowed the closure rate of rural hospitals. This work investigates which methods can ensure the long-term viability of small hospitals. This article uses a two-step design to focus on a hypothesized relationship between technical efficiency of CAHs and a recently developed set of financial monitors for these entities. The goal is to identify the financial performance measures associated with efficiency. The first step uses data envelopment analysis (DEA) to differentiate efficient from inefficient facilities within a data set of 183 CAHs. Determining DEA efficiency is an a priori categorization of hospitals in the data set as efficient or inefficient. In the second step, DEA efficiency is the categorical dependent variable (efficient = 0, inefficient = 1) in the subsequent binary logistic regression (LR) model. A set of six financial monitors selected from the array of 20 measures were the LR independent variables. We use a binary LR to test the null hypothesis that recently developed CAH financial indicators had no predictive value for categorizing a CAH as efficient or inefficient, (i.e., there is no relationship between DEA efficiency and fiscal performance).     

Technical efficiency of Critical Access Hospitals: an application of the two-stage approach with double bootstrap

The Critical Access Hospital (CAH) Program has offered Medicare cost-based reimbursement to small hospitals that meet certain eligibility criteria to improve their financial viability and quality of care. However, cost-based reimbursement has been associated with inefficiency in hospital operations. This study uses a two-stage approach and bootstrap procedures to examine the effects of environmental variables on the technical efficiency of CAHs. The two-stage approach with quality controls significantly improved statistical efficiency of parameter estimates in the second stage bootstrapped truncated regression relative to a similar model without quality controls. Overall, our results suggest that enhanced Medicare reimbursement may not have had detrimental effects on the technical efficiency of CAHs.     

A Comparative Study of Financial Data Sources for Critical Access Hospitals: Audited Financial Statements,the Medicare Cost Report,and the Internal Revenue Service Form 990

Purpose: Medicare Cost Reports (MCR), Internal Revenue Service Form 990s (IRS 990), and Audited Financial Statements (AFS) vary in their content, detail, purpose, timeliness, and certification. The purpose of this study was to compare selected financial data elements and characterize the extent of differences in financial data and ratios across the MCR, IRS 990, and AFS for a sample of nonprofit Critical Access Hospitals (CAHs). Methods: Line items from AFS of 47 CAHs were compared to data reported in the hospitals’ MCR and IRS 990s. Line items were based on 9 financial indicators commonly used to assess hospital financial performance. Findings: Of the indicators examined, the equity financing ratio most frequently matched between the 3 reports, while salaries and benefits to total expenses and debt service coverage were often different. Variances were driven by differences in individual account balances used to construct the ratios. Relative to AFS, cash was frequently lower on the IRS 990 while marketable securities and unrestricted investments were often higher. Other revenue and net income were consistently lower on the MCR and IRS 990, and depreciation was often higher on the MCR. The majority of total assets and fund balance (equity) values matched across the 3 reports, suggesting differences in classification among detailed accounts were more common than variances between the component totals (total assets, total liabilities, and fund balance). Conclusions: Health policy researchers should consider the impact of these variances on study results and consider ways to improve the availability and quality of financial accounting information.     

Meaningful Use of Health Information Technology by Rural Hospitals

Purpose: This study examines the current status of meaningful use of health information technology (IT) in Critical Access Hospitals (CAHs), other rural, and urban US hospitals, and it discusses the potential role of Medicare payment incentives and disincentives in encouraging CAHs and other rural hospitals to achieve meaningful use. Methods: Data from the American Hospital Association (AHA) Annual Survey IT Supplement were analyzed, using t tests and probit regressions to assess whether implementation rates in CAHs and other rural hospitals are significantly different from rates in urban hospitals. Findings: Of the many measures we examined, only 4 have been met by a majority of rural hospitals: electronic recording of patient demographics and electronic access to lab reports, radiology reports, and radiology images. Meaningful use is even less prevalent among CAHs. We also find that rural hospitals lag behind urban institutions in nearly every measure of meaningful use. These differences are particularly large and significant for CAHs. Conclusion: The meaningful use incentive system creates many challenges for CAHs. First, investments are evaluated and subsidies determined after adoption. Thus, CAHs must accept financial risk when adopting health IT; this may be particularly important for large expenditures. Second, the subsidies may be low for relatively small expenditures. Third, since the subsidies are based on observable costs, CAHs will receive no support for their intangible costs (eg, workflow disruption). A variety of policies may be used to address these problems of financial risk, uncertain returns in a rural setting, and limited resources.     

Impact of Conversion to Critical Access Hospital Status for Oklahoma''s Rural Hospitals

CONTEXT: The Medicare Rural Hospital Flexibility Grant Program established a new hospital category, the Critical Access Hospital, designed to provide financial stability to small rural hospitals that were losing money after changes in the Prospective Payment System implemented by Medicare. PURPOSE: This article describes the impact of conversion to Critical Access Hospital (CAH) status for 15 small rural hospitals in Oklahoma. Objectives of the study were to identify how conversion to CAH affected hospital utilization and finances for the first year after conversion. METHODS: A telephone survey was used to collect information from hospital administrators. Fifteen of 16 eligible hospitals participated in the study. FINDINGS: In general, services and patient census declined slightly with conversion to CAH. All 15 hospitals had reported losses prior to conversion, totaling $6,985,033. Ten hospitals reported losses after conversion. After converting to CAH status, the hospitals reported total losses of $3,094,547. The hospitals had a net change of $4,293,040. CONCLUSIONS: Most of the 15 study hospitals greatly improved their financial situation in the first year after conversion to CAH status, but in aggregate still operated at a loss.     

Patient Bypass Behavior and Critical Access Hospitals: Implications for Patient Retention

PURPOSE: To assess the extent of bypass for inpatient care among patients living in Critical Access Hospital (CAH) service areas, and to determine factors associated with bypass, the reasons for bypass, and what CAHs can do to retain patients locally. METHODS: Six hundred and forty-seven subjects, aged 18 years and older, who had been admitted to a hospital for inpatient care in the past 12 months and lived within 15-20 miles of 25 randomly selected CAHs were surveyed by phone during the period from early February through late July 2005. Survey questions included demographic characteristics, general health status, travel time/distance to health care, questions on satisfaction with local health services, bypass behavior, and solicited suggestions on how local hospitals could retain patients locally. FINDINGS: About 60% of surveyed patients bypassed their local CAHs for inpatient care including 16% who were referred to another facility by the local CAH/health care providers and would use the local hospital if needed services were available. Bypass rates ranged from 16% to 70% across the sampled CAHs. Factors associated with bypass included age, income, satisfaction with the local hospital, and traveling distance/time. Lack of specialty care, limited services, and the quality/reputation of local services/doctors were most frequently mentioned as reasons why patients bypass local CAHs. CONCLUSIONS: The bypass rate for sampled CAHs is considerably higher than the 20%-50% bypass rates documented in the literature for all hospitals in general using discharge/administrative data. The sizeable variation in bypass rates across CAHs suggests that the appropriate response/fix should come from the facility/community levels.     

The Medicare Critical Access Hospital Program: The First Year

The Medicare Critical Access Hospital (CAH) program, part of the Balanced Budget Act of 1997, is a nationwide limited service hospital program. Structured interviews were conducted in August and September 1998 with key people in state offices of rural health, state hospital associations, departments of health or departments of facility licensing in all 50 states to assess their progress in the development of the CAH program. The majority of states expressed interest in the CAH program. Twenty-one states were moving formally toward involvement in the program. States that had developed or were in the process of developing a state plan estimated that between 183 to 227 hospitals would convert to CAHs in the next one to two years. States that were the most successful with plan development appeared to be states that participated in the Essential Access Community Hospital/Rural Primary Care Hospital program, states where there was dialogue about the possibility of a limited service hospital program and states with widespread support in the state. A pressing need for most states is for reliable fiscal consulting or analysis that could be applied to individual hospitals that are considering conversion to CAHs. The CAH program shows promise for successful implementation based on its early results.     

The impact of the 340B Drug Pricing Program on Critical Access Hospitals: Evidence from Medicare Part B

I study the impact of expanding the 340B Drug Pricing Program to include Critical Access Hospitals (CAH) on Medicare Part B drug utilization and spending. The 340B program entitles certain hospitals and clinics to discounts on most outpatient drugs. In 2010, the Affordable Care Act expanded 340B eligibility to CAHs — small rural hospitals that receive cost-based reimbursement from Medicare. Exploiting variation in the predicted exposure to the 340B expansion in a difference-in-differences method, I find that the 340B expansion reduced Part B drug spending but did not affect Part B drug utilization. This finding contrasts with existing evidence about 340B’s impact on hospitals but is consistent with the prediction that cost-based reimbursement dampens the incentives created by the 340B discounts. I also find suggestive evidence that CAHs passed the cost savings from 340B on to patients. These results add new perspectives to the ongoing debate over 340B.     

Impact of Critical Access Hospital Conversion on Beneficiary Liability

ABSTRACT: Context: While the Medicare Critical Access Hospital (CAH) program has improved the financial viability of small rural hospitals and enhanced access to care in rural communities, the program puts beneficiaries at risk for paying a larger share of the cost of services covered under the Medicare part B benefit. Purpose: This paper examines the impact of hospital conversion to CAH status on beneficiary out‐of‐pocket coinsurance payments for hospital outpatient services. Methods: The study is based on a retrospective observational design using administrative data from Medicare hospital cost reports and fee‐for‐service beneficiary claims from 1999 to 2003. The study compares changes in beneficiary co‐payments before versus after CAH conversion with payment trends among small rural non‐converting hospitals over the same period. Findings: Conversion to CAH status is associated with an increase in beneficiary coinsurance payments per outpatient visit of $17.19, equivalent to 34% of the sample average. However, CAH designation had no significant effect on the share of outpatient costs paid by the beneficiary. Most of the increase in beneficiary liability associated with conversion is attributable to the provision of more services per outpatient visit. Conclusions: While this and other studies show that conversion to CAH status results in more intensive outpatient care, CAH conversion does not appear to inadvertently create financial barriers to accessing ambulatory services in remote rural communities by forcing beneficiaries to pay a higher share of their Medicare part B costs.     

Measuring the Performance of Critical Access Hospitals in Missouri Using Data Envelopment Analysis

Purpose: Rural hospitals are critical for access to health care, and for their contributions to local economies. However, many rural hospitals, especially critical access hospitals (CAHs) need to strive for more efficiency for continued viability. Routinely evaluating their performance, and providing feedback to management and policy makers, is therefore important. Method: Three measures of relative efficiency are estimated for CAHs in Missouri using an Input‐oriented Data Envelopment Analysis with a variable returns to scale assumption and compared with the efficiency of other rural hospitals in Missouri using Banker's F‐test. Using 30‐day readmission rate as a measure of quality, CAHs are evaluated against efficiency‐quality dimensions. Findings: CAHs in Missouri had a slight decline in average technical efficiency, but they had a slight gain in average cost efficiency in 2009 compared to 2006. More than half of the CAHs were neither economically nor technically efficient in both years. The relative efficiency of other rural hospitals was statistically higher than that of CAHs in Missouri. Conclusions: This study validates the finding of relative inefficiency of CAHs compared to other hospitals paid under the Prospective Payment System at a state level (Missouri). However, with considerable variation in socioeconomic as well as health care access indicators across states, a relative efficiency frontier may not be the only relevant indicator of value for the evaluation of the performance of CAHs. Access to health care and the impact on the local economy provided by these CAHs to the community are also critical indicators for more comprehensive performance evaluation.     

Implementing a Hospitalist Program in a Critical Access Hospital

Purpose

The hospitalist model of inpatient care has rapidly expanded, but little is known about hospitalist care in critical access hospitals (CAHs). We aimed to determine the impact of a hospitalist model of care on staff satisfaction, patient volumes, patient satisfaction, length of stay, and care quality in a CAH.

Methods

We initiated a hybrid rotating hospitalist program in September 2008 at Winneshiek Medical Center (Decorah, Iowa), a 25‐bed rural CAH. We reviewed patient volumes, Centers for Medicare and Medicaid Services core quality measures, acute length of stay, and staff satisfaction for primary care—hospitalist physicians and inpatient and clinic nurses. Patient volume and length of stay were compared with CAH data reported by the Iowa Hospital Association.

Findings

Patient volumes (acute, skilled, and observation) increased by 15% compared with a 17% decrease for statewide CAHs. Length of stay decreased from 2.88 to 2.75 days and remained lower than the average stay for Iowa CAHs (3.05 days). In the year after implementation, we observed no deterioration in core quality measures (range, 93%‐100%) or patient satisfaction (86th percentile). Inpatient nurse satisfaction and primary care‐hospitalist satisfaction improved. Early clinic nurse skepticism showed improved satisfaction at the 5‐year review.

Conclusions

Hospitalist care contributed to ongoing delivery of high‐quality care and satisfactory patient experiences while supporting the mission of a CAH in rural Iowa. Implementation required careful consideration of its effects on the outpatient practice. Broader implementation of this model in CAHs may be warranted.