Stabilizing Rural Safety Net Hospitals

This is the third edition of a Manatt Health series on safety net hospitals. To read the first issue on how safety net hospitals can benefit from the new Medicaid Access Rule, click here. For our second issue on innovative funding approaches, click here.
 

Key Points:

• Rural communities face unique economic, population health and geographic needs that contribute to the numerous challenges that rural safety net providers face in delivering health care services sustainably.
• Even though the rural population is continuing to grow, nearly a third of rural hospitals are vulnerable to closure.
• Given the structural challenges and care shortages, it is increasingly important to develop programs, policies and resources to ensure Americans in rural communities have equitable access to care.
• On November 20, Manatt Health will host a webinar on rural health strategies. Click here to register.

The Landscape of Providing Care in Rural Areas

With more than 190 rural hospital closures and conversions between 2005 and 2023, access to care in rural communities is increasingly at risk. As of 2023, about 30% of all rural hospitals were vulnerable to closure.^{1, 2} Rural communities have unique economic, population health and geographic needs that contribute to the numerous challenges facing rural providers in delivering health care services sustainably.

Rural populations are both older and sicker than their urban counterparts and experience higher rates of chronic disease and behavioral health needs.^3,4,5,6 The aging population in rural areas has resulted in an increased reliance on Medicare coverage, and economic conditions have yielded a disproportionate representation of Medicaid enrollees.⁷

Rural safety net hospitals are crucial for providing primary, urgent and specialty care in rural communities, where patients travel much farther for health services (23.9 miles versus 3.4 miles in urban areas), and specialty providers are scarce.^8,9,10,11These hospitals operate on tight budgets, mainly funded by Medicare and Medicaid, which cover over half of their revenue but reimburse less than the cost of care.¹² Given these structural challenges, it is increasingly important to develop programs, policies and resources to ensure Americans in rural communities have equitable access to quality care.

This brief considers new policy efforts aimed at mitigating both the causes and effects of these safety net hospital closures across rural America.

Existing State and Federal Policies to Support Rural Providers: Successes and Outstanding Challenges

Over the years, a patchwork of federal and state policies have been implemented to respond to the range of the challenges facing rural health care providers and the populations they serve.

Financial Supports. Federal efforts to address reimbursement levels have been somewhat successful in stemming the tide of rural hospital closures. The Critical Access Hospital (CAH) designation helped reduce financial vulnerability by providing a cost-based reimbursement system under Medicare, more flexible staffing requirements, access to resources (e.g., quality improvement programs, workforce training and technical assistance).¹³ The CAH reimbursement model coupled with the federal Rural Health Clinic (RHC) model for outpatient services is generally viewed as a sustainable reimbursement model.¹⁴ The Sole Community Hospital (SCH) also offers cost-based rate adjustments but has been less successful due to lack of updates in base rates.¹⁵ The Rural Emergency Hospital (REH) designation, created in 2020, provides an alternative designation to existing CAHs offering only emergency services, observation care and certain outpatient services at enhanced rates to recognize overhead costs.¹⁶ However, CAHs have shown limited interest in the REH opportunity due to inadequate financial incentives and 340B ineligibility.¹⁷

States have also dedicated resources to rural health facilities through various funding streams. California's legislature created a Distressed Hospital Loan Program, offering $150 million in zero-interest loans to eligible hospitals.¹⁸ New York provides supplemental Medicaid payments through its Vital Access Provider (VAP) and Vital Access Provider Assurance Program (VAPAP) to rural safety net hospitals.¹⁹ These programs target operating support for transformation initiatives that address financial viability, community service needs, quality of care and health equity.

Beyond dedicated state funding streams, several states have leveraged Medicaid supplemental payments for rural hospitals through disproportionate share hospital (DSH) payments to cover uncompensated care costs and supplemental payments, which aim to fill the gap between fee-for-service Medicaid base payments and the (higher) amount that Medicare would have paid for those same services.²⁰ For instance, Arizona's Rural Hospital Inpatient Fund, established in 2005, supplements rural inpatient payments.²¹ Arkansas used its Section 1115 Medicaid demonstration authority to create a “Rural Life360 HOME,” offering intense intervention and care coordination for rural residents, particularly those with serious mental illness or substance use disorder.^{22, 23}

Efforts to Reform Reimbursement. While these policy solutions complement one another, siloed implementation results in piecemeal improvements failing to provide a path to long-term sustainability for resource-constrained hospitals. The Center for Medicare and Medicaid Innovation (CMMI) has piloted projects to support rural providers and improve their finances. Notably, two state-specific models aim to help rural providers shift from volume- to value-driven payments:

• Pennsylvania Rural Health Model, an all-payer global budget payment system; and
• Vermont All-Payer ACO Model, which provides up-front funds for providers interested in participating in accountable care organizations.

CMMI is continuing to explore ways to support the rural safety net, including newly announced initiatives like:

• The States Advancing All-Payer Health Equity Approaches and Development model (the AHEAD model), including its methodology specifically targeting reimbursement for CAHs;²⁴
• The Transforming Maternal Health (TMaH) model, which is targeted at improving maternal health for Medicaid and CHIP enrollees with particular focus on rural and other high-need areas;²⁵ and
• The Innovations in Behavioral Health (IBH) model, which—unlike several behavioral health‑focused payment models—permits Medicare participation, thereby promoting Medicare‑Medicaid alignment. This may be especially true in rural states in which public payers predominate.^{26, 27}

Workforce Development. States play a crucial role in addressing workforce shortages through their control of licensure for medical professionals. Policy levers available to states include expanding the scopes of practice for advanced practice registered nurses and physician assistants and streamlining licensure processes.²⁸ At the federal level, Congress added 1,000 new Medicare-supported graduate medical education (GME) slots, at least 10% of which are required to be located in a rural area.²⁹

Despite these efforts, rural facilities' lower salaries and benefits, coupled with poorer working conditions, deter providers with significant debt from working in these areas. Some states use their public universities to address this challenge. For example, the University of California Programs in Medical Education (UC PRIME) aim to address provider shortages in underserved communities through specialized training and mentoring, focusing on specific underserved regions.³⁰

Outstanding Challenges and What’s Next

Additional state and federal policymaking is essential to address the ongoing challenges for rural safety net providers. This would ideally entail a comprehensive assessment of the long-term sustainability of rural safety-net providers. Policy actions could include easing eligible hospitals’ ability to apply and be approved for CAH status and rebasing the calculation of payments for SCHs, Medicare-dependent hospitals and low-volume hospitals would allow a more up-to-date calculation (and associated reimbursement) of providing care in rural areas.³¹

The table below outlines some potential remedies that could be implemented at the federal and state levels to address urgently-needed reforms in the near-term. In addition, the table lifts up potentially scalable models and examples. Notably, community and provider support is essential to garnering momentum to enact these changes.

Continued advocacy and policymaking at the federal and state level is critical to build on existing polices and models that have proven successful for rural providers and to address the ongoing equity challenges in rural health care. Further innovation to ensure equitable access to health care services in rural American communities and reverse the recent trend of rural hospital closures remains critically important.