Skip to main content

Critical Times for Small and Rural Hospitals

 |  By Philip Betbeze  
   July 08, 2014

For healthcare facilities that serve an important niche, such as critical access hospitals, a variety of pressures are changing the way they do business.

This article appears in the June 2014 issue of HealthLeaders magazine.

Although critical access hospitals are protected from many of the disruptions of the Patient Protection and Affordable Care Act, their fates will differ greatly depending on their individual circumstances. Geography, the right mix of services, affiliation with larger partners, and, most critically, cuts of preferential reimbursements that critical access hospitals currently receive but that are far from guaranteed in the future—all of these play a role.

Thanks to the decision of many states not to expand Medicaid, whether a small rural hospital or critical access hospital survives may depend on a host of variables over which leaders have little or no control. For instance, many organizations stand to benefit as more of the previously uninsured acquire health insurance, unless, of course, your state decided to not expand Medicaid.

But leaders can have only very limited influence on such circumstances. Where they can make a difference: strategy and vision. Whether they focus their strategic efforts in joining regional partnerships to make investments in EMRs, ACOs, and other care coordination models, or they find a way to offer services unique to their area or region could mean the difference between life and death.

Run them like a business

One lifeline many rural hospitals and health systems have utilized to stay afloat in recent years, so-called cost-plus reimbursement from CMS, is vulnerable, too. Most experts, including the chief administrators of these organizations, expect to eventually have to live under a value-based purchasing regime of some kind, even if it does not represent the majority of their reimbursement mix. President Obama's original budget proposal this year, even though it will not pass as is, cuts critical access Medicare reimbursement from 101% of cost to 100%.

"We've got to make sure we can run them as a business," says Charles Hart, MD, MS, CEO of Regional Health Inc., of rural and critical access hospitals.

Regional Health is a nonprofit owner of five hospitals, based in Rapid City, South Dakota. It manages, owns, or leases six critical access hospitals. It also has 40 other sites of care incorporated into the system, and its flagship, Rapid City Regional Hospital, is a 329-bed Level II trauma center. Despite its diversification, what happens to rural and critical access hospitals has deep implications for Regional Care's future.

Outside of reimbursement, Hart says the continued development of telemedicine and other remote healthcare modalities will put significant pressure on such hospitals.

"It's obvious that there will be significant changes, so from about three years ago, what we've tried to do is find ways for the individual hospitals to bring an additional service or something that's unique to our system," Hart says.

For instance, he says, many of them have a nursing home or assisted living facility, so they're trying to build bridges for patients who are transitioning from the ventilator unit or the critical care unit.

"They have to differentiate themselves," he says.

Specialty no longer a dirty word

Differentiation is the bedrock upon which Iowa Specialty Hospital is built—at least for the past several years since a 2007 merger brought together two hospitals in Clarion and Belmond, Iowa. Steve Simonin, its president and CEO, says the emphasis on differentiation is necessary because rural and critical access hospitals have to find a way to compete with and win against bigger, deeper-pocketed systems. Rural and critical access hospitals, especially, can't be all things to all people as hospitals have traditionally tried to be. Therefore, they have to develop areas of expertise and "specialize" in areas that offer high return on investment potential.

Simonin brings up the hit film The Matrix, in which humans were deceived through computer-generated mass virtual reality into believing their lives are much like we believe our lives are today, when in reality, their bodies were hooked up to machines and left in coma state between life and death as technology run amok used them, essentially, as human batteries.

"That's where most critical access hospitals are now," says Simonin. "When you're hooked up with a big system, they're sucking you dry for referrals. We woke up when we started acting on our own and thinking and acting as a business rather than as the ugly stepchild."

Iowa Specialty went to a fully employed physician model, which Simonin says is an oasis for providers who want nothing to do with working for a big health system.

"We're Keanu Reeves. We escaped from the Matrix," says Simonin.

Not that Iowa Specialty doesn't take advantage of its two campuses' critical access status while it still benefits them.

"We're utilizing our critical access status individually, but we're essentially staffed as one hospital with two campuses," he says.

But Simonin, like others, has little faith that the cost-based critical access hospital reimbursement program will endure, and even if it does, it won't be enough to survive without innovation and differentiation.

He's staked the organization on one thing that might seem counterintuitive: growth. Critical access hospitals, by definition, only receive their designation, and the concurrent bump in Medicare reimbursement rates, by maintaining no more than 25 inpatient beds, among other conditions.

Luckily, growth can be measured in many more meaningful ways than bed count.

"We wanted to increase our commercial payers as much as possible," Simonin says.

Now, because of the number of specialists it employs and its successful strategy to become a destination campus for both obstetric and orthopedic specialties and, soon, bariatric specialty, "we're at a higher level of commercial payers than we were in the past," he says. "We find that if people have a choice, they want to go to a place with the highest quality and patient satisfaction, and they don't care how big it is."

Gross revenues for the two hospitals combined were $20 million at the time of the merger. They're around $100 million now, and the hospitals boast 40 clinical providers now as opposed to the six they once had.

"Our communities have lost population but yet we're still growing," says Simonin.

In a bid for future growth, Iowa Specialty just brought in a full-time ear, nose, and throat physician as well as a bariatric surgery specialist.

"A lot of these people are coming from the bigger systems," Simonin says. "They don't want to be on call; they don't want fear of what the ACA's going to bring. A hospital's administration can't make money for the hospital; we're just agents for the providers."


In Grinnell, Iowa, Todd Linden, president and CEO of Grinnell Regional Medical Center, offers another option: affiliation. Grinnell Regional is part of the Mercy Health Network, a large joint operating agreement in Iowa between Catholic Health Initiatives and CHE Trinity Health. But alone among the nine organizations that make it up, Grinnell is not owned by either health system—it pays an annual fee to be part of the network, which Linden says offers Grinnell opportunities it would not have on its own to participate in value-based purchasing with both government and commercial payers.

Grinnell has its own integrated physician network of which about half are its employees.

"Iowa is turning into a two-system state," says Linden, the other system being UnityPoint Health, the former Iowa Health System.

"Our alliance is bringing us the skill and scale to do risk-based contracting without being on the same balance sheet so we can contract with Iowa Medicaid, for example, and Wellmark Blue Cross," he says.

Linden says without the affiliation, which is reviewed yearly, his hospital likely would not have been able to maintain its independence even until now, to say nothing of the expected tougher times ahead.

"It's great to see because it allows hospitals like ours to still be independent," he says. "Part of the strategy is to bring the resources together to be able to do the analytics. A 50-bed hospital like mine can't put all that together."

In another example, the alliance hired a former insurance executive to help analyze where it could be better prepared to take risk with commercial contracts, Linden says.

"I can't employ that guy," he says. "We also rely on the network for clinical evidence-based medicine guidelines."

He still worries, however, seeing Grinnell's current position as transitory.

"You've got a couple different moving parts in contracting. Some of the minimum requirements we would struggle with," he says.

For example, even if Grinnell could get 5,000 people in a Medicare ACO, that's not nearly enough to effectively spread the risk.

"So whether it's Medicare Advantage or an ACO, we need to be part of something larger," he says. We also have to have partners for the services we don't offer, like access to quaternary and tertiary care. We have hospice, home health, but we don't have retail pharmacy, and we don't do long-term care, so those are two things we'll have to look at locally if we're going to be offering services at full continuum."

Capital needs

The best of times may be over if your critical access hospital has glaring capital needs for a renovation or rebuild. Though there always will be funding sources, an era of ultra-cheap financing seems to be over for the most part.

"It's really hard to drive around rural America and not find a critical access hospital that hasn't been redone or rebuilt," Simonin says. "We all saw the writing on the wall, and built a new hospital or renovated our existing hospital."

From his perspective, Hart is less certain of that need.

"Reimbursement at 101% of costs still doesn't cover capital, so to do it in a way that makes sense is often quite challenging," he says. "We were already providing subsidies, so while we've certainly upgraded, we've not done total rebuilds."

A better approach is a systematic determination of whether such hospitals currently meet the community's needs or whether the community might be better off without an inpatient hospital. This would mean turning the cherished local hospital into an outpatient facility, a cardiac rehab facility, or possibly an urgent care center. But political and fiscal realities often make that transition impossible, at least while the current reimbursement model rewards the inpatient model.

"Many communities are wonderful partnership communities, but the financial realities are going to be difficult," Hart says. "I would love to see the government give you options to truly put a system in place to create what these communities need versus assuming it needs a hospital. Because of the payment system, you design your system around that versus around patient and community needs."

Hart says the fact that South Dakota did not expand Medicaid is also weighing on difficult strategic decisions that require investment.

"If our state would expand, that would provide more life to the critical access hospitals, but it would create a financial cushion so we could continue the services the community needs."

For now, grand plans succumb to more measured attempts to make the system more efficient. Hart and his leadership team spend a lot of their strategic time on how to reduce duplication of services and remove variation.

"Do we really need three CT scanners in hospitals 10 miles apart?"

There are also opportunities to more efficiently allocate the patient load among the system's array of hospitals.

"The most important thing from our perspective is that we have a bed shortage in our mother ship and excess beds in our critical access hospitals," says Hart. "We developed systems to transport patients who are not critically ill (swing bed status) to the critical access hospital. We're finding ways to utilize resources that are less unprofitable but not ideal."

Based on where reimbursement is going, Grinnell Regional's Linden also thinks rural hospitals will struggle with urgent capital needs.

"The one thing that will cause us to consider whether we can stay independent through this affiliation model is whether we would have adequate access to capital. We're too small to have our bonds rated," he says. "Banks have to guarantee our debt, and with profitability being challenged, finding banks to take that risk is hard. We're in good shape now, but a decade from now, we don't know. There's no way we could borrow $30 million today for a major renovation or replacement project without the support of a system."

Philip Betbeze is senior leadership editor with HealthLeaders Media. He can be reached at

Reprint HLR0614-5

This article appears in the June 2014 issue of HealthLeaders magazine.


Philip Betbeze is the senior leadership editor at HealthLeaders.

Tagged Under:

Get the latest on healthcare leadership in your inbox.