By Julia Harris

The Biden administration and Congress should take steps to shore up the finances of rural hospitals in order to prevent a spike in hospital closures after the public health emergency (PHE) — and the federal financial relief that it provided for the last two years — come to an end.

Before COVID-19, hospital closings were rising in rural America, with 116 rural hospital closures from 2010 to 2019. Federal COVID-related relief over the past two years helped to slow the pace of closures: Rural health care providers have received roughly $11 billion under the CARES Act of 2020 and about another $7.4 billion under the American Rescue Plan of 2021. But that aid masked the fact that the underlying finances of rural hospitals continued to deteriorate, especially with new financial pressures brought on by the pandemic.

To obtain on-the-ground insights into today’s rural healthcare landscape, the Bipartisan Policy Center (BPC) conducted interviews over the last year with rural hospital leaders from eight states — Iowa, Minnesota, Montana, Nebraska, Nevada, North Dakota, South Dakota, and Wyoming — as well as with health policy experts from federal and state government, national organizations, provider organizations, and academia.

All of the hospital association officials that BPC interviewed said that at least some hospitals in their state had negative total operating margins for three straight years, according to the latest available cost report data. The share of hospitals experiencing persistent financial losses ranged from 6% in Nevada to 38% in Wyoming. An even greater share of hospitals experienced losses on patient care alone, including half of Iowa’s 115 acute care hospitals over a three-year period.

Assessing the financial vulnerability of rural hospitals nationally, BPC found that out of 2,176 such hospitals, 441 faced three or more concurrent financial risk factors, putting them at risk of reducing their services or closing. Those risk factors included negative total operating margins, negative operating margins on patient services alone, negative current net assets, and negative total net assets.

Additionally, the impact of COVID-19 on the healthcare workforce has been staggering. Stakeholders consistently reported that attrition was present across every level of the health care system — from executives, to nurses, to surgical technicians, to custodial and environment services employees. Retaining workers and ensuring adequate staffing levels were among the top and most vexing challenges facing health systems and translated to unprecedented staffing costs for many hospitals.

In rural areas, where 46 million Americans lived in 2020, people are older, sicker, and less likely to be insured or seek preventive services than in urban areas. Roughly 1 in 3 rural residents are on Medicare and nearly 1 in 4 under age 65 rely on Medicaid as their primary source of healthcare coverage.

Not surprisingly, the closing of rural hospitals can prove devastating to the communities they serve. If nothing else, they significantly reduce people’s access to healthcare services, particularly in less densely populated places. One-way travel for health care services increased about 20 miles from 2012 to 2018 in rural communities in which hospitals had closed, and travel for less common services increased even more, the Government Accountability Office reported in 2020.

In a new report, The Impact of COVID-19 on the Rural Health Care Landscape, BPC recommends that policymakers take several short-term steps to immediately stabilize and strengthen access to Critical Access Hospitals (CAHs) and other small rural hospitals and rural health clinic services. As the PHE and federal relief end, the short-term steps would serve as a bridge to longer-term reforms.

For the short term, policymakers should provide full relief — until two years after the PHE ends — to rural hospitals from the 2% cut to Medicare’s fee-for-service payments under the budget procedure known as “sequestration”. Policymakers suspended the cut during the pandemic but under current law, a 1% cut returned on April 1, and the full 2% cut will return on a permanent basis on July 1.

Policymakers also should increase Medicare’s reimbursements for CAH services by 3% starting in fiscal 2023. Under current law, CAHs receive 101% in reimbursements for reasonable costs. This proposal would increase reimbursements by another 3%, up to 104% of costs.

The secretary of Health and Human Services (HHS) should give states the flexibility they had before 2006 to allow small rural hospitals that are otherwise ineligible for CAH status to apply for it through a “necessary provider” designation process. That would enable eligible rural hospitals to begin to receive Medicare cost-based reimbursements, while requiring them to downsize in return. Policymakers also should consider a provision in the proposed Rural Hospital Closure Relief Act, or something similar, that would allow rural hospitals that meet certain criteria to convert to CAH status, enabling struggling larger rural hospitals to downsize and remain open.

To ensure that Sole Community Hospitals (SCHs) and Medicare Dependent Hospitals (MDHs) remain financially viable, policymakers should update the base year that Medicare uses to calculate its reimbursements so that those payments for critical services more accurately reflect current costs.

To further strengthen rural facilities, the HHS secretary should make capital infrastructure grants or loans available for rural hospitals to use to modify their service lines or improve structural or patient safety. At the secretary’s discretion, the funding would go only to those facilities that otherwise do not qualify for funding under other federal rural health capital infrastructure programs.

In addition, policymakers should make permanent the Medicare reimbursement or rural designation that, for many rural hospital designations or programs, they currently must reauthorize every few years. That would give rural hospitals more financial stability and enable them to plan better.

More specifically, policymakers should make permanent the MDH designation and Medicare payment adjustments for rural hospitals that treat low volumes of patients — both of which are due to expire at the end of fiscal 2022. They also should enable SCHs permanently to receive additional payments for outpatient services because rural SCHs face substantially higher costs in delivering outpatient care.

For the longer term, policymakers should strengthen the Rural Emergency Hospital (REH) model, which they established for Medicare in late 2020, under which rural hospitals provide no in-patient service but, instead, provide 24-hour emergency services.

One way is to increase the additional facility payments (AFPs) that REHs can receive and allow them to use AFPs for a range of services, such as wellness and preventive care, as well as social supports, such as transportation. Policymakers also should test other payment pathways for REHs, to increase participation in the REH program and increase rural residents’ access to care. And they should monitor the REH program on an ongoing basis to ensure that it supports the transformation of rural hospitals.

The HHS secretary should determine whether REHs are eligible for Medicaid disproportionate share hospital (DSH) payments, which go to hospitals that serve high numbers of low-income patients, and whether the loss of access to these payments would pose a barrier for rural hospitals that are considering changing to an REH.

In addition, policymakers should ensure that REHs can receive capital infrastructure funding to update their facilities as necessary to support transformation and ensure safe and high-quality care. They also should make technical assistance available on an ongoing basis to support hospitals transitioning to and operating as REHs.

Rural residents should continue to have access to inpatient hospital care and policymakers should allow communities to leverage their local infrastructure and workforce as much as possible by, for instance, allowing REHs to have a minimal number of inpatient beds or enhanced observation beds in communities with little or no access to inpatient care. Policymakers should also ensure that new rural models meet community needs by, for instance, requiring hospitals (including new REHs) to report on at least a narrow set of rural-relevant quality indicators in order to increase accountability and improve the quality of care.

BPC’s report includes further recommendations on how the administration and Congress can ensure an adequate rural health care workforce and secure access to virtual care in rural communities.

About the author: Julia Harris is a senior policy analyst at the Bipartisan Policy Center.