Challenges for Rural Providers to Mount in 2016

The nation's population is growing while the number of its hospitals is declining. Rural areas are most affected. "If you don't need as many… trying to maintain hospitals for reasons other than for what they're designed doesn't make a lot of sense," says an industry expert.

The past 12 months have been rough for rural and non-urban hospitals, many of whom are seeing their very existence under threat. Unfortunately, there are no indications that life is going to get easier in 2016.

So says Jamie Orlikoff, a Chicago-based healthcare management consultant and veteran observer of rural healthcare for the past three decades. He has long called for critical access and community hospitals to wake up and ask the tough questions about margin and mission. Orlikoff spoke with me this week about some of the challenges that 2016 will bring. The following is an edited transcript.

HLM: What's your outlook for rural and nonurban hospitals in 2016?

Orlikoff: The pressures are going to build and accelerate and you are going to see the departures of the weaker players expanding into the middle range of the market. These pressures are going to be exacerbated by several things hitting simultaneously.

First of all, the sugar rush of Medicaid expansion is over.

Secondly, the impact of retail healthcare and high deductibles and premium shares and copays is going to put tremendous pressure on rural hospitals to provide a meaningful retail consumer-facing alternative to both new and emerging disruptive competitors, as well as larger hospitals in different markets that can draw people with money in their pockets.

Another issue is more pressure on critical access hospitals' reimbursements. There is a potential—and now we're guessing—that CAHs may be put on the prospective payment model as opposed to the cost-plus model.

Gut Check Time for Rural Providers

Most CAHs that have done the analysis conclude that they couldn't stay in business if they were on the prospective payment model. Many have not done the analysis because they're in denial. I've had people tell me 'Oh, CMS would never do that!' and then they did do that. If you go back a few years, the reimbursement used to be 105% of cost and now it's 101%. We've already seen a lot of downward pressure.

Because of this, a lot of these rural facilities, especially the CAHs, are thinking long and hard about whether or not they can remain independent or whether they need to take part in the affiliation and merger craze, [and] whether they [have to] become part of a larger system to still be able to provide services to their communities.

HLM: It sounds like you don't see the M&A market cooling in 2016.

Orlikoff: We are going to see a lot more absorption of the independents. Small rural and CAHs [will be absorbed] into larger systems and that will move from the affiliation model to the more formal acquisition model. The organizations that will be under the most pressure will be the public, district, or county authority hospitals. They are the ones that are publicly owned with publicly appointed boards that are required to have board meetings in public.

The paradox is that they have all the restrictions of public ownership, but the vast majority of them receive no benefits of tax financing.

Many small rural communities are going to be confronted with a very stark choice: Lose the facility or raise taxes and fund the facilities with tax dollars. The smart organizations are thinking about privatizing to become a 501 (c)(3). Number one, so it can be more flexible with dealing with the issues of the market and maybe they can survive. Number two, so they have a greater ability to seek out merger or affiliation partners.

HLM: Will the increased numbers of insured patients help rural providers?

Orlikoff: Most of the plans purchased on the exchanges are low-premium high-deductible plans. That shifts the whole issue of migration of bad debt away from bad debt for uncompensated care to bad debt for individuals with insurance who cannot pay their deductibles or copays.

That's what I meant when I said the sugar rush is over. Bad debt migration will be particularly impactful on small rural facilities. Then, you are going to start seeing disruptive competition. Telemedicine or clinics in Walgreens or CVS will tend to draw because of the low cost and defined prices and because of the convenience for people who have some money in their pockets to get services that they otherwise might have gotten from smaller rural providers.

The people who have 'good insurance' increasingly are going to compare the services and quality they get from small rural facilities to larger hospitals that might be an hour or two away. The risk is that you'll lose the people with money in their pockets who can pay their deductibles, which then generates the revenues to cross-subsidize the-mission based patients who generate a loss.

HLM: Will CMS eliminate the CAH program?

Orlikoff: No. They want to curb the abuses and increase the degree of accountability so that if you are a CAH five years from now you're in a place where they need one and you're working hard to provide quality care at low cost.

It's no longer a pass. It no longer will be a perfunctory demonstration of need and therefore pay on a formula that is going to guarantee that a hospital continues to exist regardless of how they perform. That is going away.

There is an underlying notion that all hospitals are going to have to operate on the same level and if you're not providing quality care, or controlling your costs, and that care can be obtained within a reasonable distance elsewhere, why should we finance you?

HLM: Does CMS understand the negative economic consequences of these rural hospital closings for the communities they serve?

Orlikoff: First of all, it's not the mission of a hospital to be an economic driver of a community. The problem is that many board members take that as their implicit mission. That leads to a notion that it is better to maintain a hospital even if it's not a good quality hospital, even if the costs are high and the quality is low, because it's good economically for the community.

That kind of thinking has put us exactly where we are today, at overcapacity. Patients in the community will say 'I'm not going to go to a hospital where the quality isn't good and it's not safe and the costs are high when I can go somewhere else.'

Second, CMS is under no obligation to think of the best economic interests of a community. It's not their purposes. CMS is looking at this tsunami of aging that is going to completely destroy the pyramid of financing model for Medicare. They are doing everything they can to maintain the solvency of Medicare for as long as they can.

HLM: What other challenges do you see?

Orlikoff: There's a trend we are seeing that doesn't bode well for hospitals. Since 1980 there has been an increase in the population of about 30 million and there has been a reduction of 15% to 20% in the number of hospitals in that same period.

Something strange is going on.

If you increase demand, which presumably an increase in population would do, you would expect the supply to remain at least constant or go up. This means the traditional supply-and-demand co-efficient doesn't apply anymore. There used to be a formula that you needed four inpatient beds per 1,000 population. The average was something like 2.9 beds per 1,000 in 2013.

The interesting question is, how many beds per 1,000 are needed? And the answer is no one knows.

So, if CMS or local board members or policy makers operate a hospital based on the economic impact that it has on a community all it does is create the dam effect that delays the re-equilibration, but doesn't prevent it. Then when it happens, it is much more aggressive.

Unfortunately, we are facing tremendous market forces with length-of-stay declines and need-for-hospitalization declines. In 1980 the average daily census in the U.S. was about 747,000 people. In 2013 that was down to 500,000.

If you don't need as many hospitals, trying to maintain hospitals for reasons other than for what they're designed doesn't make a lot of sense. It is very painful for these small rural communities. There is a notion that if you're community doesn't have a hospital it's a red flag that your community is not vibrant and may be on the decline.

(Look for part two of my interview with Jamie Orlikoff, and his recommended action plan for rural providers in next Wednesday's column.)