Low Reimbursement Rates Lead to Rural Hospital Closures


Low reimbursement rates, staffing shortages, low patient volumes, and regulatory barriers are some of the root causes of rural hospital closures, the American Hospital Association (AHA) explains in a new report.

The report “Rural Hospital Closures Threaten Access: Solutions to Preserve Care in Local Communities” highlights the variety of causes behind rural hospital closures, which totaled 136 closures over the last decade. In 2020 alone, 19 rural hospitals closed, an all-time high according to data cited from the UNC Cecil G. Sheps Center for Health Services Research.

Rural hospitals are cornerstones for the health and well-being of the patients and communities they serve. Nearly 46 million people—14 percent of all Americans—live in rural areas. What’s more, rural hospitals supported about 1 in every 12 rural jobs in the US in 2020, the report states.

When rural hospitals close, they have an outsized impact on the rural population’s health and economic well-being. Yet, these hospitals and health systems continue to shutter at an unprecedented rate.

Low patient volumes are a top reason driving rural hospital closures. The report shows that lower population densities in rural areas naturally lead to lower patient volumes at rural hospitals. Low patient volumes make it difficult for rural hospitals to sustain fix-operating costs.

Rural hospital patients also tend to be older, sicker, and poorer compared to the national average. Consequently, more rural patients are uninsured.

Combined, low patient volumes and sicker, poorer populations make it challenging for rural hospitals to participate in value-based reimbursement programs that tie payment to patient outcomes and cost of care. Providers not only need a large enough patient population to drive value-based results but the characteristics of rural patients may also make it difficult for rural hospitals to achieve enough quality improvement to earn quality or bonus payments.

Low reimbursement rates, primarily from government programs like Medicare and Medicaid, are also behind rural hospital closures.

Characteristically, rural hospitals received the bulk of their revenue from government payers, of which Medicare makes up about half. However, both Medicare and Medicaid reimburse hospitals less than the actual costs of care for treating the beneficiaries. Rural hospitals incurred $5.8 billion in Medicare underpayments and $1.2 billion in Medicaid underpayments in 2020. The hospitals also provided $4.6 billion in uncompensated care that year.

Because rural hospitals are more likely to serve a population that relies on Medicare and Medicaid, rural hospitals are not able to offset low public program payment rates with revenue from patients with commercial coverage, which often has higher reimbursement rates than government payers. Additionally, two programs designed to address these issues, the Medicare-dependent Hospital (MDH) and enhanced Low-volume Adjustment (LVA) program, which provide vital support to rural hospitals to offset financial vulnerabilities associated with being rural, geographically isolated and low-volume, are scheduled to expire Sept. 30, 2022.

But even when rural hospitals work with commercial payers, they are often forced to accept lower reimbursement rates that are below average. That is, if rural hospitals are allowed to come to the negotiation table at all.

Another driver of rural hospital closures includes staffing shortages. All of healthcare has been hit hard by the “Great Resignation,” the period during the COVID-19 pandemic when industries saw high turnover rates. However, rural hospitals have already faced significant staffing shortages since only 10 percent of physicians practice in rural areas. Nearly 70 percent of primary care Health Professional Shortage Areas (HPSAs) is also in rural or partially rural areas, the report states.

Acute workforce shortages and increasing labor expenses resulting from the pandemic have placed additional pressure on rural hospitals. Many rural providers are seeking novel approaches to recruit and retain staff.

The government has attempted to bolster the rural healthcare workforce through the National Health Service Corps and the Rural Public Health Workforce Training Network Program. However, continued support is needed to alleviate the pressure staffing shortages have on rural hospital operations.

The government should also consider regulatory reform as regulatory barriers are a major cause of rural hospital closures. All hospitals are challenged by regulations, which cost the providers millions of dollars a year for compliance. But rural hospitals face a unique challenge because they are also up against low reimbursement rates and patient volumes, which make their cost of compliance higher.

For example, while Medicare’s Conditions of Participation (CoPs) and other compliance metrics are important to ensure the safe delivery of care, future CoPs should be developed with more flexibility and alignment with other laws and industry standards. Rural hospitals can protect their communities’ access to health care by receiving relief from outdated and unnecessary regulations.

The report indicated that mergers and affiliations may help rural hospitals keep their doors open in the face of these challenges. Industry leaders have criticized hospital mergers and acquisitions, arguing that they lead to higher costs and that they even accelerate rural hospital closures.

However, Rural hospital mergers and affiliations can increase access to capital and even keep distressed hospitals have to close completely. Additionally, rural hospitals can partner or collaborate with neighboring providers to achieve economies of scale and decrease unit costs.

While many hospitals and health systems are facing unprecedented challenges, those faced in rural America are unique. We must ensure that hospitals have the support and flexibility they need to continue to be providers of critical services and access points for patients and communities.

For More Information:  low reimbursement staffing shortages lead to rural hospital closures