rural hospitals: new millennium and new...

Prepared by:

RU R A L HE A LT H RE S E A RC H CE N T E R

DI V I S I O N O F HE A LT H SE RV I C E S RE S E A RC H A N D PO L I C Y

SC H O O L O F PU B L I C HE A LT H

UN I V E R S I T Y O F MI N N E S OTA

MI N N E A P O L I S , MI N N E S OTA

Supported by:

GR A N T NO. F RO M

T H E RO B E RT WO O D JO H N S O N FO U N D AT I O N

PR I N C E TO N, NEW JE R S EY

Rural Hospitals:

February 2003

New Millennium

and New Challenges

HospitalCHTBK.2002-1/29 2/4/03 2:31 PM Page a

Rural Hospitals: New Millennium

and New Challenges

Rural Health Research Center

Division of Health Services Research and Policy

School of Public Health

University of Minnesota

Mayo Mail Code 729

Minneapolis, MN -

Single copies are available from:

Jane Raasch

Phone: 1..

Fax: 1..1

or at:

http://www.hsr.umn.edu/rhrc

Principal Investigator:

Ira Moscovice, PhD

Research Staff:

Gestur Davidson, Ph.D.

Design:

Aldrich Design

HospitalCHTBK.2002-1/29 2/4/03 2:31 PM Page b

Table of Contents

3

5

15

35

51

65

Chapter 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 2 The Organizational Structure of Rural Hospitals . . . . . . . . . . . .

Chapter 3 The Expanding Role of Rural Hospitals . . . . . . . . . . . . . . . . . . .

Chapter 4 Rural Hospital Patient and Payer Mix . . . . . . . . . . . . . . . . . . . . .

Chapter 5 Rural Hospital Financial Performance . . . . . . . . . . . . . . . . . . . . .

Chapter 6 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

HospitalCHTBK.2002-1/29 2/4/03 2:26 PM Page 1

U N I V E R S I T Y O F M I N N E S O T A

R U R A L H E A L T H R E S E A R C H C E N T E R 3

The decade of the 1990s was a period ofsignificant change and substantial chal-lenge for rural hospitals in America.Legislation passed during the last half ofthis decade—the Balanced Budget Actof 1997 (BBA), the Balanced BudgetRefinement Act of 1999 (BBRA), andthe Medicare, Medicaid and SCHIPBenefits Improvement Act of 2000(BIPA)—changed in fundamental wayshow Medicare pays hospitals for its ser-vices. Rural hospitals also experiencedincreased competition from managedcare organizations, demographic shiftswith important implications for patientvolume and mix of services, continuedtechnological advances, and changes inmedical practice.

Rural hospitals have faced these chal-lenges with various strategies, among themore dramatic the rapid increase in par-ticipation in the Critical Access Hospitalprogram (CAH). The net result of thesechallenges—and responses to them—hasbeen significant changes in the financialperformance of rural hospitals—steadyimprovement through 1996 anddeclines since.

This chart book documents the changesin rural hospitals that took place in thedecade of the 1990’s and discusses someof the challenges that face rural hospitalscurrently. We have used data from theCenters for Medicare and Medicaid

Services (CMS), the American HospitalAssociation (AHA), the HealthResources and Services Administration,the Office of Inspector General ofDHHS and special computations ofCMS data by the Medicare PaymentAdvisory Commission (MedPAC ).

Chapter 2 provides an overview of theorganizational structure of rural hospi-tals. Rural hospital structure is discussedin terms of ownership, staffing, bed size,and linkages with other organizations.

Chapter 3 outlines the health care ser-vices offered by rural hospitals andreviews the changes in the breadth andsophistication of those services over thisperiod. Recent data on the effect ofinter-organizational linkages on therange of services offered in rural commu-nities is also presented.

Chapter 4 describes trends in the pay-ment of rural hospitals with a focus onthe growing importance of Medicare andof outpatient services.

Chapter 5 highlights the significantreversal in the financial performance ofrural hospitals that occurred during thedecade of the 1990’s.

Chapter 6 presents conclusions aboutthe performance of rural hospitals.

Introduction

Chapter One



R U R A L H E A L T H R E S E A R C H C E N T E R4

Data Sources

Closures: 1998 (July, 2000), Hospital Closures:1999 (March 2001) and Hospital Closures:2000 (June, 2002).

The Medicare Payment Advisory Committee(MedPAC) compiled several sets of financialstatistics used in this chart book using speciallyprepared data from CMS. Statistics fromMedPAC’s Report to the Congress: Medicare inRural America (June 2001) and Report to theCongress: Medicare Payment Policy (March 2002)were also used. MedPAC is an independent fed-eral body established by the Balanced BudgetAct of 1997 to advise the U.S. Congress onissues affecting the Medicare program.

The AHA, CMS, and ARF data files weremerged for the analysis. The most recent dataavailable across the files were for hospital fiscalyears ending in calendar year 1999. When onlyAHA data were used in an analysis, we used the2000 AHA data.

Depending on the table, the sample size ofrural hospitals varies. The sample sizes aresmaller for more recent years due to closures ofhospitals. Also, the sample size within a givenyear varies from table to table depending on thesubject matter of the table and the amount ofnon-response for specific data items.

The American Hospital AssociationAnnual Surveys from 1990 to 2000 wereused to obtain information on rural hospi-tal organizational structure and provisionof services. The data are collected by theAHA through a national survey ofAmerican hospitals.

The Prospective Payment System’sMinimum Data Set for 1990 to 1999 wasused to obtain information on rural hospi-tal financial performance. The Centers forMedicare and Medicaid Services (CMS)requires hospitals to file annual data withtheir Medicare financial reports.

The 2001 Area Resource File (ARF) wasused to obtain information on the geo-graphical proximity of hospitals to metro-politan areas. The ARF is produced by theOffice of Research and Planning, Bureau ofHealth Professions, Health Resources andServices Administration, Department ofHealth and Human Services.

The Office of the Inspector General for theDepartment of Health and HumanServices produced a report titled HospitalClosures: 1990-1999(December 2001) andadditional annual reports entitled Hospital

Chapter One : Introduction




The OrganizationalStructure of Rural Hospitals

Throughout the decade of the 1990’s,rural hospitals played a critical rolein the delivery of health care servicesin many states.

• There were approximately 2,200 ruralhospitals in the United States in2000, representing 44% of all hospi-tals in the country and accounting for21% of all hospital beds (Table 2-1).Both as a percent of the total numberof the country’s hospitals and as apercent of the country’s total beds,rural hospitals have maintained theirshares.

Nonprofit agencies and governmentalorganizations operate the vast majori-ty of rural hospitals.

• Fifty-two percent of all rural hospitalswere owned by nonprofit entities(community and church), while 39%were owned by state or local govern-ments and 9% by for-profit firms(Figure 2-1)

• The prevalence of for-profit rural hos-pitals continues to be very concentrat-ed in the Southern region. By 2000,18% of Southern rural hospitals wererun by for-profit firms, with the nexthighest prevalence found in theWestern states (5%). The Northeasternregion no longer has any for-profitrural hospitals. (Figure 2-1)

As measured by bed size, rural hospi-tals have become smaller over the peri-od 1990 to 1999.

• From 1990 to 1999, 58% of all ruralhospitals reduced their number ofacute care beds. Over all size categoriesof rural hospitals, the average reduc-tion in the number of beds during thisperiod was 10 beds (Table 2-2)

• This significant reduction in bed sizehas resulted in an increasing propor-tion of small rural hospitals, a trendthat has accelerated from 1996 to1999. (Table 2-2)

This chapter provides an overview of the organizational structure of rural hospitals.Rural hospital structure is discussed in terms of ownership, staffing, bed size, andlinkages with other organizations.

Key FactsChapter Two




Rural Areas: Rural areas are defined as coun-ties located outside of metropolitan statisticalareas (MSAs). The Office of Management andBudget defines a county as being in an MSAif it has a city of at least , people or anurbanized area of at least , with a totalmetropolitan population of at least ,.

Beds: In general, beds refer to the number ofhospital beds available for patient use. Thisfigure does not include nursing home beds.The number of beds is reported on theMedicare hospital cost reports.

Regions: For the purposes of this study, thecountry is divided into the following regions:

Northeastern: Maine, New Hampshire,Vermont, Massachusetts, New York,Pennsylvania

Southern: Delaware, Maryland, Virginia, WestVirginia, North Carolina, South Carolina,Georgia, Florida, Kentucky, Tennessee,Alabama, Mississippi, Arkansas, Louisiana,Oklahoma, Texas

Central: Ohio, Indiana, Illinois, Michigan,Wisconsin, Minnesota, Iowa, Missouri, NorthDakota, South Dakota, Nebraska, Kansas

Western: Montana, Idaho, Wyoming,Colorado, New Mexico, Arizona, Utah,Nevada, Washington, Oregon, California,Hawaii, Alaska

Non-rural: The study does not include stateswith no rural areas—Connecticut, RhodeIsland, and New Jersey.

Definitions and Data Sources

Chapter Two : The Organizational Structure of Rural Hospitals

Rural hospitals expanded their link-ages with other health care providersthroughout the decade of the 1990’s.

• Since 1990, significant increases inlinkages occurred as rural hospitalsjoined systems, networks andalliances; however, from 1990 to1999 there was little change in theproportion of rural hospitals thatwere contract managed. (Figure -3)

• From 1996 to 1999, the increase inthe number of hospitals in systemshas been the only significant changein linkages among all rural hospitals(Figure 2-3)

• In 1999, 75% of rural hospitals par-ticipated in one or more organiza-tional linkage, up from 73% in 1996(Figure 2-3)

• There is a clear difference betweenlarger and smaller rural hospitals intheir linkages. Larger rural hospitalsare more likely to participate inalliances and systems, and smallerhospitals are more likely to be con-tract managed (Figure 2-4)

• Rural hospitals increased the num-ber of physicians they employ. From1996 to 1999, the average full-timephysicians and dentists employed byhospitals has increased by similarpercentage amounts for each of thefour hospital-size categories (Figure2-5 and 2-6)


The Implications of RuralHospital Organizational Change

Chapter Two

Rural hospitals continue to play a criti-cal role in providing health care servicesto the 55 million residents of ruralAmerica. Since 1990, rural hospitalshave become smaller in terms of staffedinpatient beds, and on net there arefewer of them. By 1999, 51% of allrural hospitals had less than 50 beds,while in 1990 the share of these small-est rural hospitals was significantly less,at 44%. The federal Critical AccessHospital (CAH) program and itsrequirement that hospitals have nomore than 15 acute-beds may have hadsome impact on this reduction instaffed beds, but through the end of1999 there were only 120 CAHs.

In spite of the clear reduction in theirbed size and number, rural hospitalshave a slightly higher share of thenation’s total short-term general hospi-tals and of the total short-term generalhospital beds. Clearly, the forces operat-ing on rural hospitals that are inducingthese reductions—shifts to outpatientprocedures, eligibility for special pay-ment programs, competition—are alsoimportant for urban hospitals.

During the decade of the 1990’s therealso have been a number of trends thathave increased rural hospitals’ influenceon the provision of health care in local



Information on organizational linkages comesfrom the AHA’s Annual Survey of Hospitals.The AHA definitions of the categories of link-ages are as follows:

Network: Hospitals participating in a groupthat may include other hospitals, physicians,other providers, insurers and/or communityagencies that work together to coordinate anddeliver a broad spectrum of services to thecommunity.

Health Care System: Hospitals belonging toa corporate body that owns and/or manageshealth provider facilities or health-related sub-sidiaries; the system may also own non-health-related facilities.

Contract Managed: General day-to-day man-agement of an entire organization by anotherorganization under a formal contract.Managing organization reports directly to theboard of trustees or owners of the managedorganization; managed organization retainstotal legal responsibility and ownership of thefacility’s assets and liabilities.

Alliance: A formal organization, usuallyowned by shareholder/members, that works onbehalf of its individual members in the provi-sion of services and products and in the pro-motion of activities and ventures. Examples ofalliances: Voluntary Hospitals of America,Consolidated Catholic Health Care, andAmerican HealthCare System.

Definitions and Data Notes





communities, including increased affili-ations with other health care organiza-tions, increased physician staffing andan expansion in the volume and typesof outpatient services they provide.

There have been notable changes inownership of rural hospitals. From1996 to 2000, the share of rural hospi-tals owned by non-profit entitiesincreased from 49% to 52%, while thegovernmental share declined to 39%from 43%. The share of for-profit hos-pitals in rural areas has shown no realchange since 1990.

In 1999, 56% of all rural hospitals weremembers of a network, an alliance or asystem, a share that has grown from53% in 1996. The share of rural hospi-tals that were contract managed fellslightly from 1996 to 1999, and theshare of hospitals with no affiliationdropped by one percentage point. Thesetrends suggest that the collaborationafforded by these affiliations is seen asbeneficial by rural hospitals.

There appear to be clear differences inthe perceived benefits of these types oforganizational linkages depending onthe size of the rural hospital. In 1999,the largest rural hospitals were almostthree times more likely to participate inan alliance, and almost twice as likely to

participate in a health care system thanthe smallest rural hospitals. But thelargest rural hospitals were less than halfas likely to be contract managed as thesmallest hospitals. On the other hand,there were no differences in the propor-tion of hospitals in networks across thefour size categories of rural hospitals.The changes observed in organizationlinkages from 1996 to 1999 reinforcethe idea of strong differential advan-tages by hospital size of participation innetworks and health care systems. Theincrease in the proportion of rural hos-pitals in systems was greatest for thelargest rural hospitals and these hospi-tals were also leaving networks at thehighest rates. Similarly, rural hospitalscontinue to react to the changes theyare confronting by employing morefull-time physicians. While the increasesbetween 1996 and 1999 are not as largeas those observed earlier in the decade,the increase in the employment ofphysicians from 1996 to 1999 wasexperienced in each of the four size cat-egories of hospitals, suggesting it wasconsidered a useful strategy for a broadrange of rural hospitals.


Average Size of Rural Hospitals and Proportion of RuralHospital Beds to Total Hospital Beds by State, 2000

Table 2-1

Number of Average Bed Size of Rural Hospital Beds to

State Rural Hospitals the Rural Hospital Total Hospital Beds

Alabama 53 78 26%Alaska 15 49 52%Arizona 18 58 12%Arkansas 57 76 50%California 41 49 3%Colorado 40 42 24%Delaware 3 137 25%Florida 32 78 5%Georgia 87 81 34%Hawaii 10 59 24%Idaho 36 51 69%Illinois 73 77 16%Indiana 46 86 20%Iowa 94 59 45%Kansas 107 44 48%Kentucky 70 87 50%Louisiana 46 63 18%Maine 26 72 49%Maryland 8 114 8%Massachusetts 3 48 1%Michigan 57 71 16%Minnesota 91 48 34%Mississippi 79 95 67%Missouri 62 77 25%Montana 50 38 80%Nebraska 72 46 58%Nevada 9 35 11%New Hampshire 16 83 47%New Mexico 22 69 44%New York 37 109 7%North Carolina 63 107 30%North Dakota 37 48 59%Ohio 55 100 16%Oklahoma 66 61 35%Oregon 32 62 28%Pennsylvania 45 111 14%South Carolina 29 100 25%South Dakota 42 40 66%Tennessee 64 80 26%Texas 162 51 15%Utah 22 44 22%Vermont 12 70 57%Virginia 35 115 24%Washington 40 52 20%West Virginia 38 92 46%Wisconsin 65 69 28%Wyoming 23 47 71%TOTAL 2,190 69 21%

Data Sources:

American HospitalAssociation AnnualSurvey of Hospitals,2000



Chapter Two


SOU

TH

CEN

TRAL


Data Source: AmericanHospital AssociationAnnual Survey ofHospitals, 2000

Ownership of Rural Hospitals by Region, 2000

Figure 2-1

Community44%

Government39%

Church8%

For-profit

9%

2000 Total(n=2192)

92%

5%3%

Proportion of RuralHospitals Owned By

CommunityGovernmentChurchFor-profit

35%

18%

5%

49%38%

48%38%42%

9%11%

2% 5%



Northeastern Southern Central Western(n=152) (n=880) (n=802) (n=358)


Figure 2-2

Number of Rural Hospitals by Staffed Bed Size, 1-1

Mean Change in the Number of Staffed Bedsfrom 1 to 1, by 1 Bed Size

Table 2-2

Beds in 1990 Mean Change

6-49 50-99 100-199 200+ 1990-1999

Mean Change in the

Number of Beds from

1990 to 1999

Percent Reduction in Beds

Percent of Hospitals

Reducing Beds

Percent of Hospitals

Increasing Beds

-3 -10 -17 -49 -10

7% 14% 13% 17% 11%

46% 63% 70% 78% 58%

15% 13% 20% 17% 15%

Data Source: CMSMedicare Hospital CostReport Data

34% 34% 35% 37%

- Beds

- Beds

- Beds

1-1 Beds

+ Beds

1990 1993 1996 1999(n=2383) (n=2276) (n=2177) (n=2194)

32% 32% 31% 28%

19% 19% 18% 17%

10% 10% 12% 14%5% 5% 4% 4%

Chapter Two







Rural Hospital Organizational Linkages, 1-1

Figure 2-3

*In 1999, 75% of rural hos-pitals participated in one ormore organizational linkage,up from 73% in 1996.

participating in one or moreorganizational linkages, par-ticipated on average in 1.6organizational linkages, alsoup slightly from 1996.

Arrangement*NetworkAllianceHealth Care SystemManagement Contract

Data Source: American HospitalAssociation Annual Survey ofHospitals Data Bases

Percent ofRural

Hospitals40

35

30

25

20

15

10

5

01990 1993 1996 1999

page 12 2/17/03 8:37 AM Page 1

* In 1999, rural hospitals

Rural Hospital Organizational Linkages by Bed Size, 1

Figure 2-4

ArrangementNetworkAllianceHealth Care SystemManagement Contract

Data Source: AmericanHospital Association AnnualSurvey of Hospitals andCMS Medicare HospitalCost Report Data

Percent ofRural

Hospitals

Less Than 50 50-99 100-199 200+ Number of Beds

60

50

40

30

20

10

0



Chapter Two

page 13 2/17/03 8:39 AM Page 1

Mean Number Full-time Physicians and Dentistson the Rural Hospital Payroll, 1-

Figure 2-5

1990 1993 1996 1999

Physician and Dentist Staffing by Bed Size, 1 and

Figure 2-6

Data Source: AmericanHospital Association AnnualSurvey of Hospitals DataBases and CMS MedicareHospital Cost ReportMinimum Data Sets

6.1

3.0

1.6

200+ Beds

(n=84)

100-199 Beds

(n=370)

50-99 Beds

(n=621)

6-49 Beds

(n=1086)

Mean Number Full-timePhysicians and DentistsEmployed By the RuralHospital.

10.8

Data Source: AmericanHospital Association AnnualSurvey of Hospitals Data Bases

3

2.5

2

1.5

1

.5

0

4.3

2.1

1.1

7.2

1996 1999







Rural hospitals converted their excessbeds to provide new inpatient services.

• Throughout the decade of the 1990’s,growing numbers of rural hospitalsoffered psychiatric inpatient services,rehabilitation services, swing bed ser-vices, skilled nursing care and hospiceservices. (Figure 3-1)

• The percentage of rural hospitals offer-ing such traditional services as ICUand OB services declined slightly overthe decade. (Figure 3-1)

• The total volume of births amongrural hospitals increased slightly, andbecame more concentrated – morehospitals had none at all and the num-ber of hospitals with more than 10births a week increased. (Table 3-1)

The total volume of surgeries per-formed in rural hospitals increasedthroughout the decade, with all of theincrease accounted for by outpatientsurgeries.

• The total number of surgeries per-formed annually in rural hospitalsclimbed by approximately one-thirdfrom 1990 to 1999. (Figure 3-2)

• While the percentage of hospitals per-forming no surgeries per weekremained stable and low, a substantialincrease in the total number of surg-eries resulted in more hospitals per-forming larger surgical volumes (morethan 10 per week) throughout thedecade. (Figure 3-2)

• Defining the concentration of surgeryperformed by the percentage of totalsurgeries performed by the top 25 percentof hospitals and alternatively by the top50 percent of hospitals, there is no evi-dence of greater concentration of surgerybeing performed among rural hospitalsfrom 1990 to 1999. (Figure 3-3)

During the decade of the 1990’s, rural hospitals provided more services directly andjoined forces with other providers to expand the number of services available in ruralcommunities. This chapter outlines the health care services offered by rural hospitalsand reviews the changes in the breadth and sophistication of those services over thisperiod. Recent data on the effect of inter-organizational linkages on the range of ser-vices offered in rural communities are also presented.

Key Facts

Chapter Three


The Expanding Roleof Rural Hospitals

• Among all rural hospitals, there was a72% increase in the number of out-patient surgeries per week from 1990to 2000. (Figure 3-4)

• From 1990 to 2000, there was nochange in the average number ofinpatient surgeries per week amongall rural hospitals (Figure 3-5)

Rural hospitals expanded the servicesthey offered to rural communities.

• Rural hospitals were increasingly like-ly to offer sophisticated diagnosticimaging services themselves orthrough a hospital-affiliate over theperiod from 1994-2000. The gain inthe proportion of hospitals offeringMRI imaging services was particularlystrong. (Figure 3-6)

• The increased rates of overall provi-sion of mammograms and MRIimaging were due solely to anincrease in the direct provision bythe hospital of these services. ForCT Scanner and ultrasound, thedirect provision by the hospital sup-planted some of the provision previ-ously available through hospital-affiliates. (Figure 3-6)

• More complex, invasive proceduressuch as radiation therapy and cardiacprocedures also increased over the peri-od of 1994-2000, with most of theincrease due to increased direct provi-sion by the hospital. (Figure 3-7)

• The changes in the provision of ser-vices for the elderly were more com-plex – the proportion of rural hospitalsoffering adult day care services, afterincreasing through 1999, dropped in2000. Growth in the proportion ofhospitals offering assisted living andretirement housing continued through-out the period. (Figure 3-8)

• There also was a mixed pattern ofchange in the proportion of hospitalsoffering home health and other ser-vices. (Figure 3-9)



Chapter Three : The Expanding Role of Rural Hospitals


Over the decade of the 1990’s, ruralhospitals increasingly eliminated excessinpatient beds in the face of financialpressures. Faced with stagnant demandfor such traditional services as obstetri-cal care and inpatient surgery, rural hos-pitals diversified into other health ser-vices throughout the decade. The per-centage of rural hospitals that providedhospice, inpatient psychiatric, andskilled nursing services all grew, as didthose that had swing beds and rehabili-tation beds.

By 1999, 35% of all rural hospitals pro-vided nursing home care in a distinct-part unit, and 59% provided homehealth services. Twenty-one percent ofrural hospitals provided both nursinghome and home health services, up

slightly since 1996. This latter group ofrural hospitals had the best financial per-formance as measured by overall net prof-it margins, both in 1996 and in 1999.However, providing both nursing homeand home health services did not keepthese hospitals from experiencing thesame deterioration in their financial per-formance from 1996 to 1999 as otherrural hospitals. The proportion of hospi-tals having both services that recordedprofits dropped 12 percentage pointsfrom 1996 to 1999. Across the otherthree classifications of hospitals, thereduction in the percentages of hospitalsposting profits ranged from 11 to 14 per-centage points.



Chapter Three

Implications of Expanded Rural

Hospital Services

The diversification of rural hospitalservices has substantial implicationsfor profitability.

• In 1999, 21% of rural hospitals hadboth a distinct-part nursing homeand a home health agency. Amongthese hospitals, 70% had positiveprofits (i.e. net profit margins). Incontrast, the proportion of rural hos-pitals with neither a distinct-partnursing home nor a home health

agency (27% of all rural hospitals)with overall positive profits was 59%.For those rural hospitals with only adistinct-part nursing home, 60% hada profit, and 64% of those with onlya home health agency had a positiveprofit (Figure 3-10)

• For each of the above categories ofrural hospitals, the proportion havinga positive profit in 1999 was marked-ly lower than in 1996. (Figure 3-11)


While the average number of surgeriesperformed on an inpatient basis wasunchanged from 1990 to 1999, thenumber performed on an outpatientbasis increased by 72% over this period.The cost-based reimbursement for out-patient services by CMS throughout thistime period provided an incentive forsome of this shift, since the prospectivepayment system (PPS) for outpatientservices was not implemented by CMSuntil August 2000. It remains to be seenhow the introduction of prospective pay-ment for outpatient services by CMSeffects this trend. This impact will bemitigated by two considerations. Due tothe Balanced Budget Refinement Act of1999, all rural hospitals with 100 orfewer beds are being held-harmlessthrough the end of calendar year 2003from any payment reductions theywould otherwise have realized from theirPPS-outpatient payments compared towhat their cost-based payments wouldhave been. The vast majority of ruralhospitals have yet to experience anyfinancial impact from PPS payment foroutpatient services. Critical AccessHospitals also will be exempt fromprospective payment for outpatient ser-vices, retaining their cost-based reim-bursement. As discussed in Chapter 4,increasing numbers of small rural hospi-tals have applied for and are being grant-ed this special designation.

Looking at the larger picture, thereappears to be a growing, more impor-tant role for surgery in rural hospitals.From 1996 to 2000, the number oftotal surgeries performed in rural hospi-tals increased by 22%, with outpatientsurgeries increasing by 37% and inpa-tient surgeries expanding by 8%. Overthis same period, the number of totalsurgeries in urban hospitals increased by8%, with outpatient surgeries up 14%and inpatient surgeries remaining con-stant. A similar pattern holds for theperiod of 1990 to 2000 as well. Thereundoubtedly are many reasons for thisdifferential growth in the performanceof surgeries in rural hospitals, includinga disproportionately older populationand a lag in the trends in utilization inrural areas compared to urban areas.Nonetheless, rural hospitals are provid-ing an increasing share of the surgicalprocedures being performed in thecountry’s hospitals—from just under15% of all surgeries in 1990 to just over17% in 2000.






Hospice services provide palliative care,chiefly medical relief of pain and supportiveservices, addressing the emotional, social,financial, and legal needs of terminally illpatients and their families. Care can be pro-vided in a variety of settings, both inpatientand at home.

Psychiatric services provide acute or long-term care to emotionally disturbed patients,including patients admitted for diagnosis andthose admitted for treatment of psychiatricproblems, on the basis of physicians’ ordersand approved nursing care plans. Long-term

care may include intensive supervision of thechronically ill, mentally disordered, or othermentally incompetent persons.

Rehabilitation services are used to provide careencompassing a comprehensive array ofrestoration services for the disabled and allsupport services necessary to help patientsattain their maximum functional capacity.

Swing beds are licensed to provide either acutecare or skilled nursing care in the same bed.

Source: AHA Annual Survey, 2000.

The high fixed costs associated withoperating an OB unit undoubtedlyaccounts for some of the increase inthe number of rural hospitals reportingno deliveries. By 2000, 27% of allrural hospitals had no deliveries. Therealso was a decrease in the number ofrural hospitals having an average of less



Chapter Three

pitals in 1990 to 256 hospitals in2000. Deliveries are increasingly likelyto occur in rural hospitals with largervolumes, which may have positiveimplications for the quality of care aswell as costs.


than one birth per week from 401 hos-




Inpatient Services of Rural Hospitals, 1-

Figure 3-1

TraditionalServices

Percent ofRural

Hospitals

1990 1993 1996 1999 2000

Non-traditionalServices

Hospice Beds

InpatientPsychiatricBeds

Rehabilitation Beds

*Skilled Nursing Care, Intermediate Care, or other long-term care

Data Source: American Hospital Association Annual Survey of Hospitals Data Bases

AgingServices

70%

60%

50%

40%

30%

20%

10%

0

ICU/CCUObstetric Care

Swing Beds

Skilled NursingCare*


Volume of Births in Rural Hospitals, 1-

Table 3-1

Year None Less Than 1 1 to 10 More than 10

1990 21% 17% 48% 14%

1993 24% 15% 46% 14%

1996 19% 20% 47% 14%

1999 26% 12% 46% 16%

2000 27% 12% 45% 16%

Percent of Rural Hospitals With Births Per Week of:


1990 1993 1996 1999 2000

MeanNumber

Per Week

5

4

3

2

1

0

Chapter Three







Surgery in Rural Hospitals, 1-

Figure 3-2

1990 1993 1996 1999 2000

40

35

30

25

20

15

10

5

0

Year None Less Than 1 1 to 10 More than 10

1990 5% 7% 34% 54%

1993 6% 7% 31% 56%

1996 5% 5% 30% 60%

1999 5% 4% 26% 66%

2000 5% 4% 24% 67%

Percent of Rural Hospitals With Surgeries Per Week of:


MeanNumber

Per Week


Surgery in Rural Hospitals, 1-1

Figure 3-3

1990 1993 1996 1999 Year3,215,740 3,355,761 3,610,623 4,248,725 Total Surgeries Performed

Percent ofTotal SurgeriesAccounted for

100

80

60

40

20

0


Top 50% of Rural Hospitals


Chapter Three









Figure 3-4

MeanNumber

Per Week

1990 1993 1996 1999 2000

Percent of Rural Hospitals With Outpatient Surgeries Per Week of:

Year None Less than 1 1 to 10 More than 10

1990 5% 11% 44% 40%

1993 6% 10% 39% 45%

1996 5% 8% 38% 50%

1999 5% 5% 31% 58%

2000 5% 4% 31% 59%


25

20

15

10

5

0


Outpatient Surgeries in Rural Hospitals, 1-2

Inpatient Surgeries in Rural Hospitals, 1-

Figure 3-5

Percent of Rural Hospitals With Inpatient Surgeries Per Week of:

Year None Less than 1 1 to 10 More than 10

1990 6% 12% 48% 34%

1993 8% 15% 43% 34%

1996 7% 15% 45% 33%

1999 7% 15% 42% 35%

2000 8% 14% 43% 35%


MeanNumber

Per Week

1990 1993 1996 1999 2000

12

10

8

6

4

2

0



Chapter Three



Diagnostic Imaging Services Provided by RuralHospitals or by a Hospital Affiliate,* 1-

Figure 3-6

Ultrasound

1994 1997 2000

Mammograms

Proportion of Rural HospitalsStaffing Certain HospitalServices in their Community

Service Provided by the Hospital

Service Provided by a Hospital Affiliate, But Not by the Hospital

* Hospital affiliates consist of providersin the local community that are eithera member of the hospital’s system, amember of the hospital’s network, ajoint venture between the hospital andanother provider, or a provider thathas a contractual agreement with thehospital to provide services in the localcommunity.

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0

1994 1997 2000

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0




CT Scanner

MRI


1994 1997 2000

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0

1994 1997 2000

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0



Chapter Three


Therapies and Procedures Provided by Rural Hospitalsor by a Hospital Affiliate,* 1-

Figure 3-7

Proportion of Rural HospitalsStaffing Certain HospitalServices in their Community



* Hospital affiliates consist of providersin the local community that are eithera member of the hospital’s system, amember of the hospital’s network, ajoint venture between the hospital andanother provider, or a provider thathas a contractual agreement with thehospital to provide services in the localcommunity.



Radiation Therapy

Angioplasty

1994 1997 2000

18%

16%

14%

12%

10%

8%

6%

4%

2%

0

1994 1997 2000

18%

16%

14%

12%

10%

8%

6%

4%

2%

0





Chapter Three


Lithotripter

Cardiac Catheterization

1994 1997 2000

20%

18%

16%

14%

12%

10%

8%

6%

4%

2%

0

1994 1997 2000

24%

22%

20%

18%

16%

14%

12%

10%

8%

6%

4%

2%

0




Services for the Elderly Provided by Rural Hospitalsor by a Hospital Affiliate,* 1-

Figure 3-8


Proportion of Rural HospitalsDiversifying into Services for the Elderly



* Hospital affiliates consist of providers in thelocal community that are either a member of thehospital’s system, a member of the hospital’s net-work, a joint venture between the hospital andanother provider, or a provider that has a con-tractual agreement with the hospital to provideservices in the local community.

Retirement HousingAssisted Living

Adult Day Care

1994 1997 2000


14%

12%

10%

8%

6%

4%

2%

0

1994 1997 2000

14%

12%

10%

8%

6%

4%

2%

01994 1997 2000

14%

12%

10%

8%

6%

4%

2%

0




Home Health and Other Services Provided by RuralHospitals or by a Hospital Affiliate,* 1-

Figure 3-9

Proportion of Rural HospitalsDiversifying into Non-traditional Services


Service Provided by a Hospital Affiliate, But Not bythe Hospital

* Hospital affiliates consist of providersin the local community that are either amember of the hospital’s system, a mem-ber of the hospital’s network, a joint ven-ture between the hospital and anotherprovider, or a provider that has a con-tractual agreement with the hospital toprovide services in the local community.

Home Health Services

1994 1997 2000

Outpatient Alcohol

and Drug Treatment

Transportation to Health Facilities


Chapter Three

80%

70%

60%

50%

40%

30%

20%

10%

0

1994 1997 2000

20%

15%

10%

5%

01994 1997 2000

30%

25%

20%

15%

10%

5%

0




Profitability of Hospitals with Distinct-Part NursingHomes and Home Health Agencies, 1

Figure 3-10


Net Margin

Under -5%

-5% to 0%

0% to 5%

Over 5%

Hospitals With a

Distinct-Part

Nursing Home

(14%)

Hospitals With a

Home Health Agency

(38%)

Hospitals With Both a

Distinct-Part Nursing Home

and a Home Health Agency

(21%)

16.7% 18.2%

24.2% 21.5%

18.7%

32.5% 30%

26.6% 30.3%

Data Source: CMS MedicareHospital Cost Report Data

Hospitals Without a

Distinct-Part Nursing Home

or a Home Health Agency

(27%)

31.9% 34.2%

32.1% 36.2%

10.6%

17.3%

19.1%


Profitability of Hospitals with Distinct-Part Nursing Homesand Home Health Agencies, Comparison of 1 and

Figure 3-11

12%

10%

8%

6%

4%

2%

0

-2%

-4%

-6%

-8%

-10%

-12%

-14%

-16%

Percentage Point Change(1999-1996) in theProportion of Hospitals in Net Margin Category

Hospitals Without aDistinct-Part NursingHome or a HomeHealth Agency

Hospitals With aDistinct-Part NursingHome

Hospitals With aHome Health Agency

Hospitals With Both aDistinct-Part NursingHome and a HomeHealth Agency

Under -5% -5% to 0 0 to 5% Over 5%




Chapter Three

Net Margin Category

page 33 2/17/03 8:41 AM Page 1

Rural Hospital Patient and Payer MixIn this chapter we describe trends in the payment of rural hospitals with a focus onthe growing importance of Medicare and outpatient services.

Key Facts

Over the decade of the 1990’s ruralhospitals depended increasingly onMedicare as a payer.

• Medicare patient days averaged 60% ofall inpatient days across all rural hospi-tals by 1999. The smallest rural hospi-tals (under 50 beds) had the highestdependence on Medicare (almost two-thirds of all their inpatient days).(Figures 4-1 and 4-3)

• The smallest rural hospitals (under 50beds) relied on swing-beds to care forpatients to a significant extent, with anaverage of one-quarter of their totalinpatient days in swing beds. Ruralhospitals with 50-99 beds rely muchless on swing beds (10% of total inpa-tient days). (Figure 4-2)

The growth of outpatient services farexceeded the growth of inpatient ser-vices in rural hospitals in the decade ofthe 1990’s.

• For the smallest rural hospitals (under50 beds), the proportion of totalpatient charges for outpatient services

averaged 53% by 1999, compared to32% in 1990. Rural hospitals withmore than 50 beds also experiencedsignificant growth in the proportionof total charges for outpatient servicesfrom 1990 to 1999—all exceeding50% growth during this period. Onaverage, outpatient services accountedfor half of total charges of all ruralhospitals in 1999. (Figures 4-4)

• By 1999, the share of total Medicarecosts for Medicare outpatient servicesaveraged 22% for all rural hospitals.The smallest rural hospitals (under 50beds) had the highest outpatient shareof total Medicare costs, 26%. In con-trast, for all urban hospitals, the out-patient share of total Medicare costswas 16% in 1999. (Figure 4-5)

• The total number of outpatient surgi-cal procedures performed in ruralhospitals grew significantly through-out the 1990’s, accounting for 73%of all surgeries performed in ruralhospitals by 1999. (Figure 4-6)



Chapter Four




Chapter Four : Rural Hospital Patient and Payer Mix

Increasing numbers of rural hospitalsobtained sole community providerstatus during the 1990’s, with thistrend continuing through 2001. Thenumber of hospitals qualifying asCritical Access Hospitals continues togrow very rapidly.

• The percent of rural hospitals desig-nated as Sole Community Hospitalsdoubled from 19% in 1990 to 38%in 2001. (Figure 4-7)

• There has been a very rapid growthin the number of rural hospitals certi-fied as Critical Access Hospitals, withsome of this growth coming fromhospitals that previously had beenSole Community Hospitals orMedicare Dependent Hospitals.(Figure 4-7)

The proportion of rural hospitalswith managed care contractsincreased rapidly until 1998, decreas-ing slightly after that point.

• The percent of rural hospitals with atleast one HMO contract, started at20% in 1990, reached a high of 64%in 1998, but had dropped to 56% by2000. (Figure 4-8)

• A similar pattern exists for the per-cent of rural hospitals with at leastone PPO contract, reaching a high of85% in 1998 but dropping to 80%by 2000. (Figure 4-8)

• Among rural hospitals that have oneor more HMO or PPO contracts, theaverage number of contracts per hos-pital is highest in 2000. (Figure 4-8)

• The smallest rural hospitals are signif-icantly less likely to have at least oneHMO or at least one PPO contractthan larger hospitals (more than 100beds). (Figure 4-9)

• Hospitals more distant from urbanareas and in counties without largercommunities are significantly lesslikely to have one or more HMOcontracts, but only slightly less likelyto have a PPO contract than hospi-tals in counties adjacent to urbanareas. (Figure 4-10)


Two important changes concerningpayer and patient mix occurred in ruralhospitals over the past decade—anincreasing reliance on Medicare as apayer of all services and a substantiallygreater growth rate in outpatient ser-vices than inpatient services. Thesechanges will have an important effecton small rural hospitals in the comingyears. For small rural hospitals, outpa-tient services account for a significantlyhigher proportion of their total charges.These hospitals also have a higherdependence on Medicare as a payer ofall services, particularly outpatient ser-vices. For the approximately 80% ofrural hospitals with 100 or fewer beds,the “full” implementation of prospectivepayment (PPS) for outpatient servicesby CMS in 2004 (when the ‘hold-harmless’ protection is scheduled toexpire) can be expected to have a largerimpact than outpatient service PPS hashad for the larger rural hospitals operat-ing under it since August, 2000.

In addition to smaller rural hospitalshaving more of their total revenue “atrisk” under outpatient PPS, the finan-cial risks themselves are likely to behigher for smaller hospitals. The fixedpayments that hospitals receive underprospective payment systems (inpatientor outpatient) reflect the average costsof average-sized hospitals. To the extentthat outpatient costs per procedure vary

systematically by the total volume ofoutpatient services produced, PPS foroutpatient services could adverselyimpact smaller rural hospitals.Statistical analyses completed byMedPAC suggest that there is a strongrelationship between outpatient volumeand costs. Hospitals performing lessthan 2000 outpatient procedures peryear have average outpatient costs perprocedure at least 20% above the over-all mean.

Although the Medicare Rural HospitalFlexibility Program that establishedCritical Access Hospitals (CAH) has anumber of other important paymentimplications for small rural hospitals,CAHs will be the only rural hospitalsexempt from outpatient PPS. CAHs areamong the smallest of rural hospitals.Given the existence of a “volume effect”for outpatient services noted previously,the rural hospitals expected to havebeen harmed the most by outpatientPPS (because of their probable higheraverage costs for outpatient services)will not be. The number of CriticalAccess Hospitals continues to grow,constituting almost 40% of all ruralhospitals with 100 or fewer beds.



Chapter Four

The Implications of Changes to Rural

Hospital Patient and Payer Mix


The percentage of rural hospitals witheither one or more HMO contracts orone or more PPO contracts peaked in1998 and then decreased in the follow-ing two years. While there were morerural hospitals in 2000 with no man-aged care contracts than two years pre-viously, over the same period the aver-age number of managed care contractsamong hospitals with at least one man-aged care contract increased. The for-mer effect could result from some ruralhospitals actively dropping managedcare contracts with organizations oper-ating within their market areas or itcould reflect the loss of managed careplans in areas in which they previouslyoperated. The increased number ofmanaged care contracts per hospitalwith at least one contract likely reflectsthe fact that the rural hospitals drop-ping/losing their managed care con-tracts had less than the average numberof contracts.

How likely rural hospitals are to haveone or more HMO contracts differssignificantly by size of the hospital andby how distant they are from urbanareas. The smallest rural hospitals aremore likely not to have any HMO con-tracts than larger rural hospitals, buthospital size makes much less of a dif-ference in the average number of HMOcontracts held by rural hospitals with atleast one contract. Rural hospitals notadjacent to an urban area or without acity of at least 20,000 are much morelikely not to have an HMO contract,but the average number of HMO con-tracts is not as affected. Both of thesefeatures of the distribution of rural hos-pitals with HMO contracts reflect theunderlying selectivity in HMO pres-ence in rural areas.





Medicare Acute Inpatient Days to Total Acute InpatientDays (Excludes Swing Bed Days) by Bed Size, 1

Figure 4-1

63%

58%

55%

54%

6–49 Beds

50–99 Beds

100–199 Beds

200+ Beds




Chapter Four



Proportion of Rural Hospitals’ Inpatient Days ThatAre in Swing Beds, by Bed Size, 1-1

Figure 4-2

1990 1993 1996 1999

Less Than 50 Beds

50–99 Beds

All Rural Hospitals withLess Than 100 Beds


30%

25%

20%

15%

10%

5%

0

Percent of Rural

Hospitals




Proportion of Medicare Inpatient and Swing BedDays to Total Inpatient Days, 1-1

Figure 4-3

1990 1993 1996 1999

Medicare Inpatient Days as a Proportionof Total Inpatient Days

Medicare and Medicaid Swing Bed Daysas a Proportion of Total Inpatient Days


80%

70%

60%

50%

40%

30%

20%

10%

0

Chapter Four







Mean Proportion of Outpatient Charges to TotalCharges in Rural Hospitals by Bed Size, 1-1

Figure 4-4

1990 1993 1996 1999

- Beds- Beds1-1 Beds+ Beds

ALL RURAL HOSPITALS

32%

1990 1993 1996 1999


60%

50%

40%

30%

20%

10%

0

40%

47%51%


Outpatient Medicare Costs as a Percent ofOverall Medicare Costs, 1 and

Figure 4-5

ALL RURAL HOSPITALS

19.6%

1996 1999


Data Source: MedPAC analysis ofMedicare cost report data from CMS.

1996 1999

22.0%

30%

25%

20%

15%

10%

5%

0

NOTE ON COMPARING FIGURES 4-4 AND 4-5

The numbers used in this figure differ fromthe previous figure in several ways:

1. This figure is based solely on Medicare(previous figure uses all payers). Medicarepatients’ use of outpatient services compared toinpatient services is less than for other payers.

2. This figure presents aggregate proportions,calculated as the ratio of aggregate outpatientcosts to aggregate total Medicare costs, and notas the mean proportion among the hospitals(previous figure).

3. This figure is based on Medicare costs, notcharges (previous figure).



Chapter Four





Proportion of Outpatient Surgeries to Total Surgeriesin Rural Hospitals by Bed Size, 1-1

Figure 4-6

Data Source: American HospitalAssociation Annual Survey ofHospitals and CMS MedicareHospital Cost Report Data

80%

70%

60%

50%

40%

30%

20%

10%

0

1990 1993 1996 1999


ALL RURAL HOSPITALS

1990 1993 1996 1999

55%

63%

68%

73%


Percent of All Rural Hospitals that are DesignatedSole Community Hospitals, 1-1

Figure 4-7

1990

Growth in the Number of Critical

Access Hospitals, 1997-2002

12/31/97 30

12/31/98 39

12/31/99 120

12/31/00 324

12/31/01 538

9/30/02 688

Data Source: CMS Medicare Hospital CostReport Data and Rural Health Research andPolicy Analysis Center, University of NorthCarolina at Chapel Hill.

1993 1996

1999 2001

19%

28%

30%

33%

38%

Chapter Four




Rural Hospitals with an HMO orPPO Contract, 1-

Figure 4-8

Data Source: American Hospital AssociationAnnual Survey of Hospitals

Percent of Rural Hospitalswith at Least One:

HMO ContractPPO Contract

Mean Number of HMO Contracts Mean Number of PPO Contracts

Held by Rural Hospitals Held by Rural Hospitals

with One or More HMO Contracts with One or More PPO Contracts

1994 2.4 5.8

1995 2.5 7.0

1996 2.9 8.2

1997 3.2 9.9

1998 3.9 10.6

1999 3.6 9.9

2000 4.0 11.9

90%

80%

70%

60%

50%

40%

30%

20%

10%

01990 1993 1994 1995 1996 1997 1998 1999 2000







Percent of RuralHospitals with atLeast One:


0

20%

40%

60%

80%

100%

Rural Hospitals with an HMO or PPOContract by Bed Size,

Figure 4-9

6-49 Beds 50-99 Beds 100-199 Beds 200+ Beds

Data Source: American HospitalAssociation Annual Survey of Hospitals

Chapter Four





Rural Hospitals with an HMO or PPOContract by Urbanicity,

Figure 4-10

0

20%

40%

60%

80%

100%

Degree of Urbanicity

Mean Number of Mean Number of

HMO Contracts Held PPO Contracts Held

by Rural Hospitals by Rural Hospitals

with One or More with One or More

Urbanicity HMO Contracts PPO Contracts

4.6 14.5

4.1 11.1

3.2 9.5

1 2 3

1

2

3

Percent of Rural Hospitalswith at Least One:




Figure - examines whether the level ofmanaged care in rural areas is dependent onthe rural area’s adjacency to urban areas andthe size of communities in the rural county.Rural counties were divided into three cate-gories. In the first category are counties adja-cent to urban areas. Managed care appears tobe most prevalent in these counties. Urbanmanaged care organizations may includeadjacent rural counties in their market areaand more aggressively sell to rural employersin these counties. In the second category arerural counties that are not adjacent to metro-

politan areas but which have a town of atleast , people. These places are expectedto have larger employers and may be moreattractive places for managed care contract-ing. As a result, the majority of hospitals inthese counties have at least one managed carecontract, averaging . HMO contracts and1.1 PPO contracts. In the third category arerural counties that have neither a city of, people nor adjacent metropolitanareas. As expected, these rural areas have thelowest level of managed care penetration.

Data Source: AmericanHospital Association AnnualSurvey of Hospitals Databasesand 2000 Area Resource File

Chapter Four



Degree of Urbanicity:

Adjacent to Urban Area

Not Adjacent to an MSA, but in a County With a City of 20,000 or More People

Non-Adjacent Counties Without a City of 20,000 or More People

1

2

3


Rural HospitalFinancial PerformanceAfter improving steadily from 1990 through 1996, the financial performance ofrural hospitals began to deteriorate and by 1999 rural hospitals were performing atlevels below those experienced in 1990. This chapter highlights the financial perfor-mance of rural hospitals from 1990 to 1999.

Key Facts

Rural hospitals had increasing per-centage discounts and allowancesfrom charges throughout the decade.

• By 1999, the average amount bywhich all rural hospitals’ gross chargeswere reduced by discounts andallowances reached 35%, havingincreased by 4 percentage points since1996. (Figure 5-1)

Rural hospitals reduced patients’length of stay throughout the decade.

• Rural hospitals responded to PPS byreducing the length of stay ofMedicare patients. Since 1990 themedian length of stay for Medicareinpatients has declined by 23%, withthe largest rural hospitals (over 200beds) having the greatest decrease overthis period, 35%, and the smallestrural hospitals having the lowestdecrease at 14%. (Figure 5-2)

• The length of stay declined more forMedicare patients than other patients.Over all rural hospitals, the overalllength of stay declined by 19% from1990 to 1999 and declined by 23%for Medicare patients. (Figure 5-2)

The profitability of rural hospitalsimproved significantly through 1996and has deteriorated since.

• In terms of both operating margins andnet profit margins, there was consider-able uniformity in the gains in financialperformance among rural hospitalsfrom 1990 to 1996. (Figure 5-3)

• The decline in financial performanceof rural hospitals since 1996 also hasbeen broad-based. In 1999, ruralhospitals at the 25th percentile, at themedian, and at the 75th percentile ofthe distribution of operating marginsand net profit margins had marginsthat were at or below the levels ofsimilarly defined hospitals in 1990.The percentage of all rural hospitalswith net losses was higher in 1999(36%) than at any other time in thedecade. (Figures 5-3 and 5-4)

• Smaller rural hospitals had poorerfinancial performance throughout the1990’s. By 1999, 46% of rural hospi-tals with fewer than 50 beds had anoverall net loss, and 32% with 50 to99 beds had net losses. (Figure 5-5)



Chapter Five




Chapter Five : Rural Hospital Financial Performance

• In 1999, rural hospitals in all size-ranges on average had Medicare inpa-tient revenues exceeding theirMedicare inpatient operating costs.However, Medicare inpatient grossmargins for rural hospitals were downmarkedly from 1996. (Figure 5-6)

• By 1999, the overall Medicare marginfor hospitals ranged from –2.2% forthe largest rural hospitals to -4.3%for the smallest hospitals. For all ruralhospitals, the Medicare overall margindropped from +5.0% in 1996 to–3.2% in 1999. (Figure 5-7)

Hospitals in Medicare special pay-ment programs experienced similarreductions in their financial perfor-mance to rural hospitals not in theseprograms during the period 1996 to1999.

• Rural Referral, Sole Community orMedicare Dependent hospitals hadsimilar reductions in their overallMedicare margins from 1996 to 1999as rural hospitals not in these pro-grams. (Figure 5-8)

• The reductions from 1996 to 1999 innet profit margins of rural hospitalsare significantly smaller than thereductions in overall Medicare mar-gins. (Figure 5-8)

By 1999, the number of rural hospi-tals at risk of closing for financialreasons climbed to levels compara-ble to those found in 1990.

• The proportion of rural hospitalswith losses greater than 10% oftheir total revenues for two consecu-tive years was 4.4% in 1999, com-pared to 0.9% in 1996 and 4.6% in1990. This is important since back-to-back annual losses of 10% ormore of revenues are a strong pre-dictor of subsequent hospital clo-sure. (Figure 5-4)

• The proportion of rural hospitalswith losses greater than 20% oftheir fund balance for two consecu-tive years was 7.9% in 1999, com-pared to 4.0% in 1996 and 8.3% in1990. Back-to-back annual losses of20% or more of fund balances arealso a strong predictor of subse-quent hospital closure. (Figure 5-4)

Closures of rural hospitals rose in1999 after having declined duringmuch of the decade.

• Rural hospital closures are a reflec-tion of the general financial healthof rural hospitals. Twenty-two ruralhospitals closed in 2000, their high-est level since 1993. (Figure 5-9)


The Implications of Changes in Rural

Hospital Financial Performance

A significant reversal in the financial per-formance of rural hospitals occurred dur-ing the decade of the 1990’s. Up to 1996,rural hospitals experienced steadyimprovement in their financial perfor-mance as measured by operating marginsand overall net profit margins. By 1999,these indicators dropped to levels at orbelow where they stood in 1990. Thischange was broad-based, uniformly affect-ing rural hospitals of all size categories andall levels of financial performance.

Among the underlying reasons for thisreversal was the slower growth inMedicare payments to all hospitals in thelate 1990’s. In addition, rural hospitalsexperienced a higher annual increase intheir inpatient costs per discharge thanurban hospitals beginning in 1996. Theimpact of both is reflected in theMedicare overall margin, or the differencebetween all Medicare payments andMedicare allowed-costs expressed as a per-centage of Medicare payments. This mar-gin fell for all rural hospitals from +5.0 %in 1996 to –3.2 % in 1999.

The median rural hospital had a total netprofit margin of 4.5% in 1996 and 2.2%in 1999. Focusing on just operating mar-gins (i.e. the difference in total patient rev-enue and total patient costs expressed as apercent of total patient revenue), the medi-an rural hospital had an operating marginof –0.5% in 1996 and –3.5% in 1999.These declines do not include any impactof prospective payment for outpatient ser-vices by Medicare, since this paymentchange was instituted in August of 2000.

Hospital inpatient costs per case begin toincrease during the last half of the decadeafter declining steadily in the first half.Rural hospitals had annual reductions intheir average length of stay throughout thedecade but these reductions became small-er each year. This reduction in thedecrease in the average length of stay likelyis one cause of the cost per case increases.

As noted in Chapter Four, managed careorganizations become an important payerfor rural hospitals in the 1990’s. The addi-tional competitive pressure they, other pri-vate payers, and Medicaid programsbrought to bear on rural hospitals is reflect-ed in the increasing discounts andallowances from charges.

In 1999, taking into account all patientrevenue, philanthropy, endowment revenueand grants, the median rural hospital wasstill making an overall profit. Even by thisbroadest measure of financial health, 36%of rural hospitals had net losses, and morethan a quarter of these (9.8% of all ruralhospitals) had net losses of more than 10%.There were 84 rural hospitals (4.4% of allrural hospitals) in 1999 that experiencedlosses of this magnitude for two consecutiveyears, a more than four-fold increase since1996. In addition, in 1999 there were 151rural hospitals with net losses that exceeded20% of their fund balances for two consec-utive years. It isn’t surprising that the num-ber of closures has begun to rise for ruralhospitals.



Chapter Five





The importance of these trends for thefuture of rural hospitals will depend,among other factors, on how the Medicareprogram changes implemented since 1999and in the coming years will affect ruralhospitals. The changes in theDisproportionate Share (DSH) paymentsystem due to the Medicare, Medicaid andSCHIP Benefits Improvement andProtection Act of 2000 (BIPA) will almosttriple the number of rural hospitals eligibleto receive DSH payments. Analysis byMedPAC of the impact of this changesuggests that it will halve the differencebetween urban and rural hospitals in theaggregate percentage increase in paymentsresulting from all Medicare special pay-ment provisions.

Beginning in calendar year 2004, all ruralhospitals will receive prospective paymentfor outpatient services due to the sched-uled termination of the special hold harm-less provision for rural hospitals with 100or fewer beds (approximately 80% of allrural hospitals). Small hospitals generallyfare poorer under prospective paymentprograms, with their payments based onaverage costs by average-sized hospitals.The transitional “corridor payments”established by Congress to ease the adjust-ment to full PPS for outpatient servicesalso are scheduled to expire at the end of2003. The impact on rural hospitals of thefull PPS for outpatient services will be mit-igated by the exclusion from outpatientPPS of all Critical Access Hospitals. Thecontinued growth in the number of smallrural hospitals qualifying for this specialpayment program will provide significanthelp to smaller facilities.

Skilled nursing care is provided by morethan a third of rural hospitals in distinct-

part units. PPS for skilled nursing facilities(SNFs) was first introduced in July 1998.Two of the temporary increases in the origi-nal SNF PPS payment rates that were enact-ed by Congress expired in September 2002.In addition, skilled nursing care provided byhospitals in swing-beds began to be paid onthe basis of SNF PPS starting in July 2002.The impact of both of these changes willnot be experienced by Critical AccessHospitals that have swing beds, since theyare exempted from SNF PPS under BIPA.

Finally, home health services are provided byalmost 60% of rural hospitals. Full PPSpayment for these services began in October2000. Because of Congressional concern foraccess to these services by Medicare benefi-ciaries in rural areas, rural hospitals have hada 10% add-on payment over their PPS ratesthat is scheduled to expire in April 2003. Asubstantial cut in the base rate for all hospi-tals under PPS for home health services alsobegan in October 2002.

Among the possible future changes thathave been proposed for Medicare paymentpolicy, introducing an adjustment for low-volume producers of inpatient and outpa-tient services portentially is the most signifi-cant for rural hospitals. Fixed costs are largeenough and patient loads low enough toinevitably lead to significantly higher unitcosts in small rural hospitals. MedPACanalyses suggest this disadvantage is largely amatter of size per se. The CAH initiative,with its requirement of fewer than 15 acutecare beds and cost-based reimbursement, islikely to address this volume-effect for smallrural hospitals that get certified as CAHs.For small rural hospitals not certified asCAHs, a volume adjustment may berequired to undo the inherently unlevelplaying field PPS creates.


Mean Discounts and Allowances ofRural Hospitals, 1-1

Figure 5-1

26%

29%

31%

35%

1999

1996

1993

1990

Data Source: CMSMedicare Hospital CostReport Data



Chapter Five



Lengthof Stay

in Days All Patients

1990 1993 1996 1999

7

6

5

4

3

2

1

0



Median Length of Stay in Rural Hospitals by Bed Size, 1-1

Figure 5-2

Lengthof Stay

in Days


Medicare Patients

Median Length of StayAdjusted for Case MixComplexity

Less Than 50 Beds

50-99 Beds

100-199 Beds

200+ Beds

Overall Median1990 1993 1996 1999

7

6

5

4

3

2

1

0


Rural Hospital Profitability, 1-1

Figure 5-3

Operating Margins

Operating Margins and Net

Profit Margins For:

Rural Hospital at the 25th Percentile

Median Rural Hospital

Rural Hospital at the 75th Percentile


1990 1993 1996 1999

10%

8%

6%

4%

2%

0

-2%

-4%

-6%

-8%

-10%

-12%

1990 1993 1996 1999

10%

8%

6%

4%

2%

0

-2%

-4%

-6%

-8%

-10%

-12%

Net Profit MarginsChapter Five







Rural Hospital Financial Performance

Figure 5-4

1990 1993 1996 1999

Rural Hospitals with Net Losses

Number Percent Number Percent Number Percent Number Percent

1999 .% .% .% .%

1996 .% .% .% .%

1993 .% .% .% .%

1990 .% .% .% .%

Rural Hospitals withLosses>10% of Revenues

For 1 year 2 consecutive yrs.

Rural Hospitals withLosses >20% of Fund Balances

For 1 year 2 consecutive yrs.


40%

35%

30%

25%

20%

15%

10%

5%

0%


Rural Hospital Profitability By Bed Size

Figure 5-5

Less than 50 beds

Median Operating Margin -8.6% -5.6% -4.9% -7.6%

Median Net Profit Margin 0.9% 2.5% 2.3% 0.4%

46.4% 35.2% 35.7% 46.1%

50-99 beds

Median Operating Margin -1.9% -0.1% 0.9% -2.3%


28.2% 23.5% 16.7% 31.5%

100-199 beds

Median Operating Margin 1.0% 2.3% 3.2% 0.1%


17.7% 11.1% 8.4% 22.0%

200 or more beds

Median Operating Margin 0.4% 1.9% 3.5% -0.6%


6.8% 10.2% 3.4% 14.3%

1990 1993 1996 1999

Source: CMS MedicareHospital Cost Report Data

Chapter Five




Percent with Net Losses






Rural Hospital Medicare Inpatient Gross Marginsby Bed Size, 1-1

Figure 5-6

Hospitals with Under 50 Beds

1990 1993 1996 1999 Year

1. 1. 1.2 .99 Case Mix

. . . . Adjusted Length of Stay

Hospitals with 50-99 BedsMedian MedicareInpatient Margin

Median MedicareInpatient Margin

10%

8%

6%

4%

2%

0

-2%

-4%

-6%

1990 1993 1996 1999 Year

1. 1. 1. .12 Case Mix


10%

8%

6%

4%

2%

0

-2%

-4%

-6%



Hospitals with 200+ Beds

Median MedicareInpatient Margin

Hospitals with 100-199 BedsMedian MedicareInpatient Margin

1990 1993 1996 1999 Year

1. 1. 1.25 .23 Case Mix


10%

8%

6%

4%

2%

0

-2%

-4%

-6%

1990 1993 1996 1999 Year

1. 1. 1. .31 Case Mix


10%

8%

6%

4%

2%

0

-2%

-4%

-6%

Source: CMS Medicare Hospital Cost Report Data

Chapter Five







6

4

0

4

6

8

Overall Medicare Margin for Rural Hospitalsby Bed Size, 1 and 1

Figure 5-7

*The overall Medicare margin incorporatesall Medicare-related payments and costs tohospitals, including outpatient, hospital-based skilled nursing and home health ser-vices. There is some shifting in the allocationof fixed costs between inpatient and outpa-tient sectors; as a result, an overall marginthat incorporates all costs into a single mar-gin is a better measure of overall impact. Inaddition, these margins are computed asaggregate margins for the size-category; with-in each size-range, larger hospitals havegreater than average and smaller hospitalshave less than average impact on these aggre-gate margins. They measure the margin forthe size-range as a whole rather than for the

8%

6%

4%

2%

0

-2%

-4%

-6%


Data Source: MedPAC

cost report data from CMSanalysis of Medicare

“typical” hospital as does a median.

Overall Medicare Margins and Net ProfitMargins by Type of Rural Hospital

Figure 5-8

TYPE OF RURAL HOSPITAL 1996 1999 1996 1999

Rural Referral Centers 5.9% -2.1% 9.2% 7.5%

Sole Community Hospitals 6.1% -2.4% 6.1% 3.4%

Medicare Dependent Hospitals 3.2% -3.0% 4.0% 2.5%

Other, Less Than 50 Beds 2.4% -5.4% 3.8% 1.7%

Other, 50 Beds or More 4.2% -5.1% 6.9% 3.6%

Overall Medicare Margin Net Profit Margin

Data Source: MedPAC, Reportto the Congress: MedicarePayment Policy, March 2002

Chapter Five






Rural Hospital Closures, 1-

Figure 5-9

Data Source: American HospitalAssociation Annual Survey ofHospitals Data Bases and Office ofthe Inspector General (OIG),Department of Health and HumanServices, various reports on hospitalclosure 1993-2000.

* The OIG indicates that a majority of“closed” facilities convert to some type ofhealth-related facility.

Number ofClosed Rural

Hospitals*

40

35

30

25

20

15

10

5

0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000



ConclusionsAlthough many rural hospitals haveproved themselves to be resilient, thedecade of the 1990’s presented substan-tial challenges and as a consequencethey made several significant changes.First, to achieve efficiencies in an evermore competitive marketplace and inresponse to incentives provided byMedicare’s special payment programs,rural hospitals contracted in bed size.Over the decade, almost 60% of allrural hospitals reduced the number ofbeds they staffed, on average a reduc-tion of ten staffed beds. By 2000, overhalf of all rural hospitals had fewerthan 50 beds.

Second, rural hospitals broadly diversi-fied their service lines. Significantlymore rural hospitals were providinghospice services, skilled nursing care,inpatient psychiatric services, and rehaband swing bed services. They alsobecame more organizationally complex,with more rural hospitals participatingin networks, alliances and hospital sys-tems. By 1999, three-quarters of allrural hospitals had one or more ofthese organizational links.

Despite these changes, the financialhealth of rural hospitals suffered. Aftersteady improvement through 1996, thefinancial performance of virtually all

rural hospitals quickly and sharplydeteriorated. By 1999, rural hospitalswere less fiscally viable than they hadbeen at the outset of the decade.

Due in large part to increasing com-petitive pressures, rural hospitals havebecome more sensitive to the policychanges by their major payer,Medicare. The increased competitivepressures are reflected by the deeperdiscounts and allowances that ruralhospitals offered over the decade. Thesensitivity to Medicare reimbursementand policy changes can be seen in twoways. On the one hand, the slow-downin base-payment increases by Medicarein the latter half of the decade con-tributed to the poorer financial perfor-mance of rural hospitals. On the posi-tive side, the rapid growth in conver-sion to Critical Access Hospitals is aresponse to the disadvantage rural hos-pitals are placed at by prospective pay-ment systems.

Looming on the horizon are severalscheduled changes in Medicare reim-bursement with important implica-tions for rural hospitals. While CAHsare protected from many of thesechanges, it remains to be seen howsmall rural hospitals not in the CAHprogram will fare.



Chapter Six


Rural Health Research CenterDivision of Health Services Research and Policy

School of Public HealthMinneapolis, Minnesota

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rural hospitals: new millennium and new...

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