Looming Sequestration Cuts Put Rural Providers on Edge

Those doomsday scenario automatic and across-the-board federal spending cuts that were specifically designed to be so painful that they never would occur, in fact, probably will occur at the end of the month.

The so called "sequestration" stipulated in the Budget Control Act of 2011 triggers about $1.2 trillion in spending cuts over the next nine years. A creature of spineless partisan politics, sequestration has evolved in the last few months from a Capitol Hill sideshow into a viable threat. And now it's a looming concrete reality that will take effect on March 1.

At this point, the only hope for stopping the cuts would be for Congress to broker some sort of budget deal involving targeted spending cuts and tax hikes. As a general rule, when your only hope relies on Congress taking action you should brace for the worst.

Healthcare providers in general, and rural providers in particular, have entered duck and cover mode. Earlier this month the National Rural Health Association's Rural Health Policy Institute learned that the 2% mandated cuts to Medicare totaling more than $2.9 billion in 2013 would disproportionately ill-effect the small rural providers that rely on federal government funding to keep their doors open.

"Sadly, it sounds like all arrows are pointing towards sequestration going into effect—attitudes that didn't seem that way just a few weeks ago," Maggie Elehwany, NRHA's vice president of government affairs and policy, told HealthLeaders Media.

"Our whole message to Capitol Hill is that a 2% across-the-board cut might sound like a way of providing equitable pain, but it is actually disproportionately harmful to the rural safety net. We are trying to let people know that there are serious ramifications to sequestration in rural America and a 2% cut to a small rural hospital can mean services being cut to patients and it could mean job losses. When you are operating at that small margin, and 40% of rural facilities already operate at a loss, this 2% cut on top of this other uncertainty is incredibly challenging."

Estimates provided to NRHA by iVantage Health Analytics show that urban hospitals would eat about $2.4 billion of the $2.9 billion in Medicare cuts this year, while rural hospitals would take a $482.6 million hit.

Urban hospitals will lose more overall dollars, according to iVantage. Rural providers, however, would be disproportionately affected because of their thinner operating margins, negligible economies of scale, and a reliance on Medicare funding to provide care for an older, sicker, poorer population.

"Rural hospitals probably don't have burn centers, or oncology, or Level 3 trauma centers,  but if you trim the outliers of care, these rural hospitals have to do the same blocking and tackling that urban hospitals have to do every day," iVantage Executive Vice President John R. Morrow says.

"You are hitting the organizations that are required to offer a breadth of services that it is already difficult to provide in the rural setting because of the lack of economies of scale."

"A lot of times," Morrow says, "you get lost in this idea that it is the big academic medical centers or the tertiary care centers that matter the most. It depends on where you live. If you are one of the 80 million Americans who lives in a rural area you don't really care how many beds they have as long as they have one for you at the time you need it."

In addition to the effect on care access and delivery, sequestration will almost certainly mean job cuts. Morrow estimates that the 2% Medicare cuts will result in about 73,000 lost jobs, including more 12,100 jobs at rural hospitals. The money once generated by those axed employees will no longer circulate in their communities.

"You are talking about jobs because the biggest single budget line item in a hospital budget is labor, 60% on average nationally," he says.

"If you are going to reduce reimbursement for the Medicare payments, which are typically 50% to 55% of a hospital's payer mix, by 2% that in effect reduces total revenues by 1%. The simple arithmetic is you take out 1% and if 60% of a hospital's budget is labor then .6% is going to be directly labor and the rest of it is highly capital intensive. You can't take the bricks and mortar and sell them off. You have a big capital infrastructure and there are only so many things you can control. It ends up being labor, which is a big one. Those are middle-class jobs. These would be really good jobs, career jobs. That is a little scary."

But wait! It gets worse!

The footing for rural providers becomes even more treacherous when the sequestration cuts are combined with other federal mandates, such as the Patient Protection and Affordable Care Act.

"Part of our message to Capitol Hill is that it is not just sequestration," Elehwany says. "It's a whole bunch of things hitting small rural providers at the same time. If you are a rural (Prospective Payment System) hospital, you lost your Medicare-dependent status for several months last year. Fortunately in the fiscal cliff bill you regained that. If you were a rural hospital with a low-volume hospital adjustment you also lost that. Those are going to expire again at the end of September."

"There are also the rigors of complying with the ACA and (disproportionate share) payment reductions. Critical access hospitals have their own threats. The president is probably going to propose in his budget again to reduce cost-based reimbursement for those hospitals, and maybe the elimination of some of them within a certain mileage of another facility."

Elehwany says she is fearful that the budget cuts combined with the mandates will recreate the environment in the late 1980s and early 1990s when federal government shifted to the Prospective Payment System and scores of rural hospitals across the nation shuttered.

"That is when Congress intervened and said ‘these are critical points of care for rural patients. We need to make sure that they keep their doors open,'" Elehwany says. "That is when they intervened and created unique payments for rural providers. We are trying to gently remind Congress why these payments were needed in the first place."

Of course, there is still time. Elehwany insists she isn't surrendering on sequestration and she is urging every rural hospital executive and to contact their senators and congressmen and speak with their local news media make sure they understand the affect that the sequestration cuts would have on providing care for their communities, constituents and neighbors.

"We also remind Congress that the rural population is vulnerable," she says. "They are proportionately older, poorer and sicker and less likely to be insured—just about every negative. We are doing everything we can to see if we can protect them. We know it's a long shot but we have to try."