Rural Hospital Closures: Number and Characteristics of Affected Hospitals and Contributing Factors
Released: 2018-09-28T00:00:00

Letter

Background

Rural Hospitals and Areas

In 2017, about 2,250 general acute care hospitals in the United States were located in areas that met FORHP’s definition of rural; these rural hospitals represented approximately 48 percent of hospitals nationwide and 16 percent of inpatient beds. These hospitals were spread across the 84 percent of the United States land area that FORHP classified as rural, and served the 18 percent of the United States population that lived in these areas.

While there are significant differences across rural areas and populations, as a whole they differ from their urban counterparts in several ways. For example, rural areas have the following characteristics:

Higher percentage of elderly residents. In 2014, 18 percent of the population was aged 65 or older in rural counties, compared with 14 percent in urban counties.

Higher percentage of residents with limitations in activities caused by chronic conditions. In 2010-2011, 18 percent of adults in rural counties had limitations in activities caused by chronic health conditions, compared with 13 percent in large, central urban counties.

Lower median household income. In 2014, the median household income in rural counties was approximately $44,000, compared to $58,000 in urban counties.

Rural areas have also experienced several changes in recent years that have exacerbated these differences. For example, according to research by the United States Department of Agriculture, rural areas have experienced the following changes:

Decreasing population. From 2010 through 2015, the population in rural areas declined, on average, by 0.07 percent per year, while the population in urban areas increased, on average, by 0.9 percent per year.

Slow employment growth. From 2010 through 2015, rural employment grew at 0.8 percent per year, less than half that of urban areas (1.9 percent per year).

Federal Response to Rural Hospital Closures in the 1980s

Rural hospital closures are not a recent phenomenon. For example, we previously reported that between 1985 and 1988, 140 rural hospitals closed—approximately 5 percent of the rural hospitals in 1985. The large number of closures in the 1980s was preceded by a change in how Medicare paid hospitals. Specifically, in 1983, Medicare’s inpatient prospective payment system was created, whereby predetermined rates were set for each Medicare hospital discharge. The intent was to control Medicare costs by giving hospitals financial incentives to deliver services more efficiently and reduce unnecessary use of inpatient services by paying a hospital a predetermined amount. However, one consequence of the new payment system was that some small, rural hospitals experienced large Medicare losses and increased financial distress.

Partially in response to the number of rural hospital closures, FORHP was established in 1987 to, among other things, advise the Secretary of HHS on the effects of current and proposed policies on the financial viability of small rural hospitals and on access to and quality of health care in rural areas; establish and maintain a clearinghouse for information on rural health coordinate rural health activities within HHS; and administer grants and other instruments to fund activities to improve health care in rural areas.

HHS Administers Multiple Payment Policies and Programs That Support Rural Hospitals and Funds Research Centers to Monitor Closures and Access

HHS Administers Payment Polices and Programs That Provide Financial Support to Rural Hospitals, Including Medicare Rural Hospital Payment Designations

HHS officials identified several rural-specific HHS payment policies and programs as providing key financial support to rural hospitals, and in turn, rural residents’ access to hospital services. These key HHS payment policies and programs may be placed into three categories: (1) Medicare rural hospital payment designations; (2) rural grants, cooperative agreements, and contracts, and (3) new approaches in rural health care delivery and payment (see table 1).

Medicare rural hospital payment designations. CMS administers five rural hospital payment designations, in which rural or isolated hospitals that meet specified eligibility criteria receive higher reimbursement for hospital services than they otherwise would have received under Medicare’s standard payment methodology. A rural hospital may qualify as a Critical Access Hospital, Sole Community Hospital, or Medicare Dependent Hospital—each of which has different eligibility criteria and payment methodologies. With the exception of Critical Access Hospitals, rural hospitals may also qualify as Low Volume Hospitals and Rural Referral Centers, in which eligible hospitals receive additional payments or exemptions. The largest of the five designations is the Critical Access Hospital program, which represented 56 percent of rural hospitals in 2017 and pays eligible small, rural hospitals based on their reported costs (instead of the standard rates under the inpatient prospective payment system). (See app. I, table 2, for a description of each of the five Medicare rural hospital payment designations.) CMS was unable to provide estimates of the additional Medicare payments rural hospitals received from each designation in 2017. According to CMS officials, CMS generally does not model the amount of additional Medicare payments resulting from rural hospital payment designations, except in years when there is a related payment policy change going through rulemaking.

Rural grants, cooperative agreements, and contracts. FORHP administers multiple grant programs, cooperative agreements, and contracts that provide funding and technical assistance to rural hospitals. The largest of these is the Medicare Rural Hospital Flexibility grant program, in which FORHP provides funds to states to support Critical Access Hospitals to stabilize their finances, foster innovative models of care, and support other improvement activities. In 2017, 45 states received $25 million in Flex grants. FORHP officials noted that they can provide information to help states determine how to best target Flex grant funds, as there is not enough funding to financially assist all Critical Access Hospitals that are at risk of closing. (See app. I, table 3, for a description of the rural grants, and cooperative agreements and contracts identified by HHS officials.)

New approaches in rural health care delivery and payment.

CMS’s Center for Medicare & Medicaid Innovation (Innovation Center) tests new ways to deliver and pay for health care—including some focused on rural areas—with the goal of reducing spending and preserving or enhancing the quality of care for beneficiaries enrolled in Medicare, Medicaid, and the Children’s Health Insurance Program. As of June 2018, the largest of these rural models and demonstrations was Medicare’s Accountable Care Organization Investment Model. Groups of providers in rural and underserved areas participating in this model, potentially including small hospitals, agree to be held accountable for the cost and quality of care to their Medicare patients. The model tests providing pre-paid shared savings as an incentive for providers in rural and underserved areas to form Accountable Care Organizations and for these organizations to transition to arrangements with greater accountability for financial performance. For fiscal years 2012 through 2018, $96 million had been obligated to organizations participating in the model. Forty-five Accountable Care Organizations were participating in this model as of 2018. (See app. I, table 4, for a description of the new approaches in rural health care delivery and payment identified by HHS officials.)

In addition to the HHS payment policies and programs specifically targeting rural areas, HHS officials also identified broader payment policies and programs that they stated can provide key support to rural hospitals and rural residents’ access to hospital services. These HHS payment policies and programs may be placed in four categories:

Medicare and Medicaid base payments. These consist of the standard payments for hospitals services.

Medicare and Medicaid uncompensated care payments. Both Medicare and Medicaid provide multiple types of additional payments to support hospitals that incur costs for services provided to uninsured and other low-income individuals for which the hospitals are not fully compensated. Medicare also provides bad debt payments to hospitals to reimburse them for a portion of Medicare’s beneficiaries’ unpaid deductibles and coinsurance, as long as the hospital makes a reasonable effort to collect the unpaid amounts.

Other targeted HHS payment policies and programs. HHS administers other targeted payment policies and programs that support specific types of providers and areas, including, but not limited to, rural hospitals and areas. In particular, the Health Resources & Services Administration, an HHS agency, administers a drug discount program targeted at certain hospitals and other safety net providers. In addition, CMS administers bonus payments for certain physician services provided to Medicare beneficiaries in areas with a shortage of health professionals.

State Innovation Models Initiative. The Center for Medicare & Medicaid Innovation’s State Innovation Models aim to achieve better quality of care, lower costs, and improve health for the population of the participating states or territory. Some states’ plans include testing new delivery and payment models specifically targeting rural areas.

HHS Funds Research Centers That Monitor Rural Hospital Closures and Study Access

HHS monitors rural hospitals’ financial viability and rural residents’ access to hospital services, primarily by funding rural health research centers that track rural hospital closures and study rural residents’ access to hospital services.

To monitor rural hospitals’ financial viability, HHS funds and conducts several activities:

Tracking rural hospital closures and monitoring profitability. The North Carolina rural health research center, a FORHP-funded rural health research center, tracks rural hospital closures and monitors rural hospitals’ profitability and other financial indicators. North Carolina’s researchers identify rural hospital closures through a multi- party agreement with FORHP, the American Hospital Association, and the National Rural Health Association, each of which alerts the research center once one learns about a closure. Research center staff then confirm the closure and ascertain whether the hospital converted to another facility type by searching the hospital website and calling a community leader, such as the mayor. The North Carolina rural health research center publishes a list of rural hospital closures since 2010 on its website. It also publishes reports on rural hospitals’ profitability, including the extent to which profitability varies by rural hospitals’ characteristics, and how rural hospitals’ profitability compares to the profitability of their urban counterparts.

Monitoring Critical Access Hospitals’ financial indicators. The North Carolina rural health research center, through its role as part of the Flex Monitoring Team, develops and monitors various financial indicators for Critical Access Hospitals. Using the hospitals’ Medicare cost reports, the research center currently monitors 22 financial indicators under 6 domains—profitability, liquidity, capital structure, revenue, cost, and utilization. These financial indicator data are available to every Critical Access Hospital through an online tool that also helps those hospitals compare their financial performance to peer hospitals. The Flex Monitoring Team also publishes state-level summary data on Critical Access Hospitals’ finances that are available on its website.

HHS also reviews and estimates the financial effect of policy changes on rural hospitals. In particular, FORHP officials review proposed and final rules for Medicare, Medicaid, and the Affordable Care Act’s health insurance exchanges to identify concerns from a rural health perspective. Drawing on the research it funds, FORHP officials may suggest policy modifications to CMS, such as exempting certain Medicare rural hospital designations from a proposed policy change. In addition to FORHP officials’ review, as required by statute, CMS conducts regulatory impact assessments that estimate the effect of policy changes on payments to hospitals, including small rural hospitals, and publishes key results as part of proposed and final rules. For example, as part of the fiscal year 2018 final rule on Medicare payment for hospital inpatient services, CMS estimated that the expiration of the Medicare Dependent Hospital designation would have decreased the payments to rural hospitals with that designation by 0.9 percent, or approximately $119 million. Subsequent to the final rule, the Medicare Dependent Hospital and Low Volume Hospital designations were both extended.

To monitor rural residents’ access to hospital services, HHS relies on research conducted by the FORHP-funded research centers. Examples of recent research on rural residents’ access to hospital services conducted by FORHP-funded research centers include the following:

Research on rural residents’ access to hospitals. In 2018 the North Carolina rural health research center published an analysis of populations in rural counties without access to an acute care hospital or other types of primary care facilities. North Carolina’s researchers estimated that about 4.4 million rural residents currently live in a county without an acute care hospital.

Research on access to specific hospital services. The Minnesota rural health research center conducted a body of research on declining access to obstetric services in rural counties. These researchers found that between 2004 and 2014, the percent of rural counties without hospital obstetric services increased from 45 to 54 percent, through a combination of hospital and obstetric-unit closures.

Research on options for ensuring rural residents’ access after a hospital closure. The Iowa rural health research center published a summary of currently available options for ensuring rural residents’ access to hospital services after a hospital closure, and additional policy options under consideration. The National Advisory Committee on Rural Health and Human Services, a 21-member citizens’ panel of nationally recognized rural health experts that advises HHS, also examined this topic, with a focus on alternative models to preserve rural residents’ access to emergency care in light of the recent surge in rural hospital closures. The committee noted that payments and grants to support rural hospitals were largely effective and stabilized rural hospital financial operations until 2013, when a new wave of rural hospital closures began. The report included recommendations regarding the design of alternative models, including that HHS seek public comments on the use of a combination of geographic distance and demographic or social determinants of health when setting eligibility criteria.

To supplement the monitoring by FORHP-funded research centers, FORHP officials also track recent rural developments and reports from rural health stakeholders. FORHP officials said this monitoring adds a qualitative component to the quantitative research conducted by research centers. In particular, these activities often provide the first notice of a rural hospital closure or pending closure, and also help track changes to the status of former hospitals over time.

HHS Uses the Results of Its Monitoring Activities to Inform Future Research and Grant Awards, and Disseminates This Information

HHS uses the results of its monitoring activities on rural hospitals’ financial viability and rural residents’ access to inform related research, primarily conducted by HHS-funded research centers, and to determine future areas of research. For example, the North Carolina rural health research center has used the list of rural hospital closures it compiles and its monitoring of profitability to conduct research on predictors of rural hospitals’ financial distress. In addition, FORHP officials stated that, based on this monitoring, they have added topics to research centers’ agendas for subsequent years to gather more information on regulatory changes identified in its review of policy changes. Each year, specific research projects for the rural health research center are selected jointly by the center directors and FORHP. Topics are selected to have a timely impact on policy debates and decisions at both federal and state levels. Examples of added topics include North Carolina’s research on the financial importance of the Sole Community Hospital and Low Volume Hospital designations and Iowa’s research on the engagement of rural providers in Accountable Care Organizations.

HHS has also used the results of its monitoring activities to update the types of services offered by certain grants and create new cooperative agreements for technical assistance. Specifically, for fiscal year 2016, FORHP officials updated the list of activities that Rural Health Network Development Planning grantees can spend funds on to include implementing innovative solutions to alleviate the loss of local services and enhance access to care in communities that have or are at risk of losing their local hospital. According to FORHP officials, the addition of this activity to the scope of the grant led to 11 of the 47 applicants from fiscal years 2016 and 2017 to come from rural communities with a recent rural hospital closure or perceived risk of closure. As another example, in response to increased funding, in 2018 FORHP announced a new cooperative agreement to provide targeted in-depth assistance to vulnerable rural hospitals within communities struggling to maintain health care services. The awardee of the Vulnerable Rural Hospitals Assistance Program must work with vulnerable hospitals and their communities on ways to ensure hospitals and communities can keep needed care locally, whether it is with a more limited set of services provided by the hospital, or by exploring other mechanisms for meeting community health care needs.

FORHP disseminates the results of this research and successful rural health grants and other projects by funding cooperative agreements to maintain clearinghouses of information about rural health issues. These clearinghouses were originally designed to efficiently disseminate research findings from rural health research centers to the public and to help rural communities identify opportunities and information to provide better healthcare to their residents. According to one of these clearinghouses, since then, the focus has grown to developing evidence- based resources on rural health to share what works in rural communities, including toolkits and case studies.

Recent Increases in Rural Hospital Closures Have Disproportionately Occurred in the South, With Multiple Factors Likely Contributing to These Closures

From 2013 through 2017, More than Twice as Many Rural Hospitals Closed than in the Prior 5 Years

Our analysis of data from the North Carolina rural health research center and CMS shows that, from 2013 through 2017, 64 of the approximately 2400 rural hospitals in the United States closed. These 64 rural hospital closures represented the following:

More than twice the number of rural hospitals that closed during the prior 5-year period. From 2008 through 2012, 31 rural hospitals closed (see fig. 1).

More than the share of urban hospitals that closed. The 64 rural hospital closures from 2013 through 2017—approximately 3 percent of all rural hospitals in 2013—exceeded the 49 urban hospital closures during the same time period—approximately 2 percent of all urban hospitals in 2013.

More than the number of rural hospitals that opened. The 42 rural hospitals closed from 2014 through 2016 exceeded the 3 rural hospitals opened during the same time period.

Approximately half of the rural hospitals that closed from 2013 through 2017—47 percent—ceased to provide any type of services. The remaining hospitals that closed during this period converted to other facility types, providing more limited or different services, such as urgent care, emergency care, outpatient care, or primary care.

Rural Hospitals with Certain Characteristics— Including Those Located in the South—Accounted for a Disproportionate Share of Closures from 2013 through 2017

Our analysis of data from the North Carolina rural health research center and CMS shows that rural hospitals with certain characteristics—including those located in the South—accounted for a disproportionate share of the 64 closures that occurred from 2013 through 2017.

Geography. Rural hospitals located in the South represented 38 percent of the rural hospitals in 2013, but accounted for 77 percent of the rural hospital closures from 2013 through 2017 (see fig. 2). Texas, one southern state, represented 7 percent of the rural hospitals in 2013, but accounted for 22 percent of the rural hospitals closures from 2013 through 2017.

Medicare rural hospital payment designations. Medicare Dependent Hospitals – one of three Medicare rural hospital payment designations in which hospitals were eligible to receive a payment rate other than standard Medicare inpatient payment rate – were disproportionately represented among hospital closures. Specifically, Medicare Dependent Hospitals represented 9 percent of the rural hospitals in 2013, but accounted for 25 percent of the rural hospital closures from 2013 through 2017. Rural hospitals that did not receive one of these three Medicare rural hospital payment designations also represented a disproportionate share of the closures (see fig. 3). In addition, hospitals designated as Low Volume Hospitals had a disproportionate share of the rural hospital closures.

Ownership. For-profit rural hospitals represented 11 percent of the rural hospitals in 2013, but accounted for 36 percent of the rural hospital closures from 2013 through 2017 (see fig. 4). According to literature we reviewed, hospitals with for-profit status had a higher probability of financial distress and were more likely to close. For example, a 2017 study found that for-profit hospitals were more than twice as likely to experience financial distress relative to government- owned and non-profit hospitals from 2000 through 2013.

Bed size. Rural hospitals with between 26 and 49 inpatient beds represented 11 percent of the rural hospitals in 2013, but accounted for 23 percent of the rural hospital closures from 2013 through 2017. Critical Access Hospitals have 25 acute inpatient beds or less and make up a majority of the rural hospitals, but were less likely than other rural hospitals to close. FORHP officials identified the Critical Access Hospital payment designation – in which Medicare pays designated hospitals based on their costs – paired with the related Medicare Rural Hospital Flexibility grant program as the most effective HHS payment policy and program to support rural hospitals’ financial viability and rural residents’ access to hospital services.

Fewer Patients Seeking Inpatient Care and Reductions in Medicare Payments Have Likely Contributed to Rural Hospital Closures

According to literature we reviewed and stakeholders we interviewed, rural hospital closures were generally preceded and caused by financial distress. In particular, rural hospitals that closed typically had negative margins which made it difficult to cover their fixed costs. For example, one 2016 study found that rural hospitals that closed from 2010 through 2014 had a median operating margin of -7.41 percent in 2009. In contrast, rural hospitals that remained open during the same time period had a median operating margin of 2.00 percent in 2009. In addition, there is evidence that for-profit hospitals have been more sensitive to changes in profitability and more likely to experience financial distress, which could explain the disproportionate number of closures among rural hospitals with for-profit ownership type.

The literature we reviewed and stakeholders we interviewed identified multiple factors that likely contributed to increased financial distress and closures among rural hospitals. One such factor was a decrease in patients seeking inpatient care at rural hospitals due to the following: Increased competition for the small volume of rural residents. Rural residents may choose to obtain services from other health care providers separate from the local rural hospital, for example from an increasing number of federally qualified health centers or newer hospital systems outside of the area. The competition for the small volume of rural residents between rural hospitals and other health care providers potentially increased due to the shift to paying for value instead of volume, and technology changes. This increased competition for a small volume of rural residents could explain disproportionate closures among hospitals receiving the Low Volume Hospital Medicare payment designation, hospitals that by definition have a low Medicare volume and that research has found have lower margins than other rural hospitals. In addition, representatives from the American Hospital Association told us that technological advances have allowed more services to be provided in outpatient settings. For example, changes in health care technology have expanded the provision of outpatient surgical procedures.

Declining rural population. The years 2010 through 2016 marked the first recorded period of rural population decline. According to literature we reviewed and stakeholders we interviewed, the recent population decline in rural areas was likely associated with the recent decline in rural residents seeking inpatient services.

Another factor highlighted by literature we reviewed and stakeholders we interviewed as contributing to rural hospitals’ increased financial distress was across-the-board Medicare payment reductions. Rural hospitals are sensitive to changes to Medicare payments because, on average, Medicare accounted for approximately 46 percent of their gross patient revenues in 2016. A 2016 study found that Medicare Dependent Hospitals’ operating margins decreased each year from 2012 through 2014, which could explain the disproportionate number of closures among the Medicare Dependent Hospital payment designation. The literature we reviewed and stakeholders we interviewed highlighted the recent Medicare payments cuts as contributing to rural hospital closures, which included the following:

Reductions in nearly all Medicare reimbursements. Under sequestration – the cancellation of budgetary resources under presidential order implemented pursuant to the Balanced Budget and Emergency Deficit Control Act of 1985, as amended – each fiscal year since 2013, nearly all Medicare’s budget authority is subject to a reduction not exceeding 2 percent, which is implemented through reductions in payment amounts. According to stakeholders we interviewed, these payment reductions have contributed to negative margins for rural hospitals.

Reductions in Medicare bad debt payments. Under the Middle Class Tax Relief and Job Creation Act of 2012, Medicare bad debt reimbursements for hospitals were reduced beginning in fiscal year 2013. According to stakeholders, Medicare bad debt cuts have been one of the most important factors contributing to the recent increase in rural hospital closures.

The literature we reviewed and stakeholders we interviewed also identified factors that likely strengthened the financial viability of rural hospitals. Chief among these factors was the increased Medicaid eligibility and enrollment under the Patient Protection and Affordable Care Act. A 2018 study found that Medicaid expansion was associated with improved hospital financial performance and substantially lower likelihood of closure, especially in rural markets and counties with large numbers of uninsured adults before Medicaid expansion. Another 2017 study found that from 2008-2009 and 2014-2015 the drop in uninsured rates corresponded with states’ decisions to expand Medicaid on or before January 1, 2014. The increase in Medicaid coverage and decline in uninsured were both largest in the small towns and rural areas of those expansion states. Additionally, our analysis of data from the North Carolina rural health research center and CMS shows that from 2013 through 2017, rural hospitals in states that had expanded Medicaid as of April 2018 were less likely to close compared with rural hospitals in states that had not expanded Medicaid (see fig. 5).

Agency Comments

We provided a draft of this report to HHS for comment. The Department provided technical comments, which we incorporated as appropriate.

As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the appropriate congressional committees, the Secretary of Health and Human Services, the Administrator of Health Resources & Services Administration, the Administrator of CMS, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov.

If you or your staffs have any questions about this report, please contact me at (202) 512-7114 or cosgrovej@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix II.

Appendix I: Rural-Specific Payment Policies and Programs That Provide Key Support to Rural Hospitals

Officials from the Department of Health and Human Services (HHS) identified several rural-specific HHS payment policies and programs as providing key support to rural hospitals, and in turn, rural residents’ access to hospital services. These key HHS payment policies and programs may be placed into three categories:

Medicare rural hospital payment designations (table 2);

Rural grants, cooperative agreements and contracts (table 3); and

New approaches in rural health care delivery and payment (table 4).

Appendix II: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, Greg Giusto (Assistant Director), Alison Binkowski (Analyst-in-Charge), George Bogart, Zhi Boon, Leia Dickerson, Krister Friday, Mike Hoffman, Peter Mann-King, Beth Morrison, Vikki Porter, Merrile Sing, and Chris Woika made key contributions to this report.