Don't Take Critical Access Hospitals for Granted

Cheryl Clark, March 24, 2010

In all the drama and uncertainty about how healthcare reform will impact the nation, let me share a surprising gem that helps keep perspective about medicine for rural America.

More than one in every four hospitals in the United States is not a large fancy building with lots of doctors and nurses and the latest diagnostic equipment, and a big donor's name on the front door.

On the contrary, at least 25% are small structures with no more than 25 beds and usually low profiles. One facility was recently described to me as "little more than a large closet." He was joking, of course.

They're almost always located in remote, very rural parts of the country or at least 35 miles away from any other acute care facility. Often, they are nonprofit, government or quasi-government owned.

They are called critical access hospitals, or CAHs. They provide just as their name implies, critical access, often for patients with pneumonia or a broken leg who must be seen right away. Moreover, their patients must average a length of stay of no longer than four days.

As of the late 1990s, these types of small hospitals enjoy a Medicare perk of being able to bill at 101% of their cost, a better deal than the traditional diagnostic related group or prospective payment systems by which non-critical access hospitals are federally reimbursed.

Across vast stretches of the country, farmland, desert, and mountains, it's the critical access hospital where medicine is urgently provided.

"The vast majority of care provided in rural areas comes from critical access hospitals," says Terry Hill, executive director of the Rural Health Resource Center in Duluth, MN. "Policymakers in Washington, D.C. seem to be clueless about who provides healthcare in rural America."

Here's another bit of information that surprised me: Two-thirds of these critical access hospitals are located in the Midwest, however only 28 of the 1,300 are in a state where you might expect to see a lot more of them—California.

Hill explained that these small rural hospitals were closing by the hundreds in the 1980s and 1990s because they couldn't stay financially viable under old federal payment system rules.

In 1998, the Centers for Medicare and Medicaid Services established the critical access hospital category, and many struggling facilities grabbed the new designation and cost-reimbursement system as a lifeline.

But critical access hospitals are fragile, Hill says. The services they provide cannot be provided at a community clinic or a federally qualified health center where patients do not spend the night.

"Critical access hospitals should be regarded as safety nets. They're basically the place you can go to in an emergency when you're in rural America, and they can't be expected to have the same economies of scale and efficiencies" as larger urban general acute care hospitals, Hill explains.

I was intrigued by the saga of the critical access hospital after I recently stumbled upon a report produced by the California HealthCare Foundation, which examined the health of the 28 CAHs that I mentioned earlier and which dot the hills, valleys, and deserts of the Golden State.

To my surprise, two-thirds of those critical access hospitals reported negative operating margins in 2008, though 73% had positive total margins, so they apparently managed to subsidize their operations.

The main sources of those subsidies are district fees or taxes on property parcels for those hospitals in special government-run health districts, or shared revenue for those CAHs that are part of larger systems, or philanthropy.

"CAHs as a group struggle to break even on operations, yet through the use of non-operating support they are able to achieve a positive median total margin," the report said.

The report noted some striking findings about those critical access hospitals that are struggling. For starters, those with long-term care facilities are much more likely to be burdened by negative operating margins (the poorest six facilities). The five financially healthiest hospitals did not operate long-term care programs.

"Clearly, we know that those who have long-term care facilities are struggling," notes David O'Neill, senior program officer with the California HealthCare Foundation. "Hospitals that offer services not reimbursed at cost, such as long-term care, home health or hospice dilute the financial benefit," the report said.

Another factor associated with profitability, according to the report, is location and proximity to resorts such as Mammoth or Lake Tahoe, where well-insured, affluent vacationers may get injured and need care.

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