Pennsylvania’s ongoing experiment with a novel approach to healthcare financing aims to lower costs while reducing the rate of hospital closures in more vulnerable rural areas.

The Rural Health Model aims to provide participating hospitals relief by reducing costs and offering a more stable and predictable revenue stream to allow these providers to budget more effectively. Unlike the standard fee-for-service model, participating hospitals are reimbursed by Medicare, Medicaid, and participating commercial insurance carriers, in fixed monthly installments as opposed to being based on the value of claims received. The amount of the monthly installment is calculated by examining total reimbursement averages for prior years.

The hope is that by making it more feasible for these hospitals to stay open, rural communities will be able to retain access to care, benefit from an improvement in quality, and result in improved health outcomes for rural communities.

“Our intent was not only to change payment, but to transform what rural hospitals look like and how they deliver care to their communities,” former PA secretary of health, Karen Murphy said in a comment about her role in the initial planning process. “Our goal was to provide a mechanism where rural hospitals were not counting on heads in the beds for reimbursement. In a pay-for-service model, you are paid for what you do, not how well you do it.”

Over the last several decades rural hospitals have been under increasing financial strain. The reasons a hospital may close its doors vary, but like other for profit businesses, it is not immune to the effects of local economic depression, which may lead to a smaller, poorer service area population consisting of a larger percentage of Medicare and Medicaid recipients.

Rural parts of the U.S. tend to be home to a larger share of uninsured and low-income residents. These populations have much worse overall health outcomes compared with their more affluent, urban counterparts.

In 2019, the CDC announced that it had identified a large disparity between rural and urban populations when it comes to deaths as a result of the top five most common preventable causes.

Under the typical fee-for-service model, hospitals rely on reimbursements from private commercial insurance carriers to offset the much lower payments received from Medicare and Medicaid. As a rural area becomes more economically depressed or less populated but costs incurred by providers continue to increase, hospitals are forced to find ways to make cuts, including reducing the number of services they offer. This may affect the number of beds available, tests, and scans that can be performed, and size of nursing staff, among other important items and services.

This can lead to a downward spiral, in which the already fewer number of commercially insured patients that live nearby begin preferring to travel rather than avail themselves of a facility which they have begun to perceive as providing limited or substandard care. The additional reduction in commercially insured patients may result in further decline in the hospital’s services and reputation, further financial strain, and in turn, more budget cuts.

Though there has been an increasing rate of hospital closures for decades, the Affordable Care Act’s impact on Medicare and Medicaid reimbursement rates caused additional strain on the already small margins of rural hospitals.

Indeed, in 2019, a study by University of Washington researchers found that such closures in rural areas caused a 5.9 percent rise in mortality rates. However, there is conflicting research on the issue.

In 2015, Health Affairs published a national study of hospital closures over the preceding decade which found no evidence of any worse health outcomes following hospital closures. The results were again reproduced when specifically limited to closures within low-income rural areas on the assumption that patients there would be more negatively impacted. However, again they found no evidence of worse health outcomes following closure when looking only at those target service areas. Curiously, in some instances they actually noted a measurable reduction in mortality rates compared with controls.