New law offers rural hospitals new payment model—if they scrap inpatient beds

Rural hospitals facing closure will soon have another option: a payment model that allows them to convert to standalone emergency departments while ending inpatient services.

Starting in 2023, CMS will offer a new “Rural Emergency Hospital” designation to facilities that agree to wind down inpatient care and build up outpatient services.

The program, authorized by a spending bill President Donald Trump signed last December, aims to help facilities become more financially stable by scaling back their operations while maintaining some critical services for patients.

This option won’t be enough to halt the ongoing spate of rural hospital closures, which have reached 180 since 2005, including 20 last year alone, according to data from the University of North Carolina. But it could enable rural hospitals that see very few inpatients to avoid shuttering entirely.

“This new model is really targeted at communities which, for whatever reason, are not able to sustain an inpatient hospital. This is seen as an alternative to having a closure,” said George Pink, a professor at the University of North Carolina at Chapel Hill’s Department of Health Policy and Management.

The Rural Emergency Hospital model is the first new hospital designation Congress has created in decades. In 1997, lawmakers established the “Critical Access Hospital” model that boosted Medicare reimbursements in an attempt to stop rural hospital closures, but it has had limited success. Most of the nation’s rural hospitals are CAHs. And these facilities must maintain at least 25 inpatient beds in order to retain that designation and the special payments that come with it. The new policy is intended for small rural hospitals with very low inpatient volumes, as few as one or day a day.

For some rural hospitals, the high fixed costs of maintaining inpatient services for shrinking local populations and declining patient volumes has become an albatross around their necks, with a growing number eventually closing under financial pressure.

The ability to dump those inpatient services while still getting higher reimbursements from CMS through the Rural Emergency Hospital designation could be a lifeline for some, said John Hawkins, senior vice president of government relations at the Austin-based Texas Hospital Association.

“I think there’s a considerable number of hospitals that will take advantage of this,” he said. Twenty-four rural hospitals have closed in Texas since 2005, the most of any state during that time period, the UNC database shows.

“They basically have kept their inpatient status so they can access the 101% cost-based reimbursement,” Hawkins said. “We ought to let them redesignate themselves in a way that meets the needs of the community but still give them enhanced federal funding.”

Under the new policy, current Critical Access Hospitals and rural Prospective Payment System hospitals with fewer than 50 beds can convert to the new Rural Emergency Hospital (REH) status.

Using this designation, they can furnish outpatient services, including around-the-clock emergency care, observation, nursing facility services and ambulances—but not inpatient services. Because they’re getting rid of inpatient care, REHs must have transfer agreements with regional Level 1 or Level 2 trauma centers.

In exchange, hospitals adopting the REH model will receive a Medicare outpatient rate that is 5% higher than what full-service hospitals receive, and will get monthly facility payments, although the size of those payments remains undetermined. The program begins Jan. 1, 2023.

The Medicare Payment Advisory Committee (MedPAC) called for a voluntary payment model geared toward standalone emergency departments in rural areas that can’t support inpatient services in a 2018 report, a recommendation reflected in the new statute.

MedPAC raised concerns about the impact on access to emergency care in rural communities when hospitals close their doors. Helping a facility maintain outpatient services while eliminating costly inpatient care that can be provided elsewhere—albeit at a location further away—can help these rural facilities remain in business, the panel concluded.

“They want to continue to be that access point of care in their communities, but staying open as an acute care facility may not be the most feasible option—both financially, and it’s just not what the community ultimately needs,” said Carrie Cochran-McClain, the chief policy officer at the Overland Park, Kansas-based National Rural Health Association (NRHA).

“It’s scary to give up inpatient services but that might be a better alternative than losing a hospital altogether,” she said.

The NRHA estimates between 50 and 100 hospitals will be eligible to become REHs. There are more than 1,800 rural hospitals in the U.S., and one-fourth of them are vulnerable to closure based on financial performance, according to the Chartis Center for Rural Health. Even more could become at risk of closure in the post-pandemic landscape, according to the center.

A MedPAC report released earlier this month analyzed 40 rural hospitals that closed between 2015 and 2019: In all cases, they experienced large declines in all-payer inpatient admissions in the years before closure, largely due to patients going elsewhere for care. From 2005 to 2014, these hospitals averaged a 54% drop in inpatient admissions.

“I think the model holds promise to be an alternative, innovative new way of meeting healthcare needs in rural communities where inpatient hospitals might close,” said UNC’s Pink. “The uptake will depend on the outcome of the rulemaking process CMS is going through. There has to be a financial case for hospitals to take it up.”

Still, the program is voluntary. Hospitals should go through multiple levels of analysis to determine whether changing designations is advisable, said Martie Ross, office managing principal for PYA, a healthcare consulting and accounting firm headquartered in Kansas. The fact that CMS has yet to issue regulations is a significant obstacle to hospitals’ decision making in the meantime.

Facilities will have to consider factors such as the need for inpatient services in their communities, their capacity for EMS services and their relationships with other regional hospitals.

While some rural hospitals could save money and improve their margins by closing inpatient services, it’s not clear if the new model will provide enough revenue to cover operating costs. That could prove a tough sell.

“Where I think this makes sense, or where I think it’s likely the math will work, are smaller hospitals that are part of health systems,” Ross said.

For many rural hospitals, the decision undoubtedly will come down to money over other considerations. PYA’s state-based analysis of the REH payment model found that it would cover between 80% to 87% of rural hospitals’ costs.

That analysis doesn’t take into account the monthly facility payment REHs would receive under the program, but CMS hasn’t revealed what that will be. Based on the formula laid out in the law, each REH could get about $1 million per year in facility payments, Ross estimated. Hospital industry groups maintain that the law allows CMS to boost these payments so REH’s come out ahead financially.

Other obstacles to transitioning to an REH include state licensing requirements and community objections to losing local access to inpatient services.

“The law is basically saying: We want to help you by giving you money, but the only way we’ll give you money is if you give up a service that might be critically important to your community,” said Harold Miller, president and CEO for the Center for Healthcare Quality and Payment Reform in Pittsburgh. “If a hospital closes more services, it’s going to be easier for it to close altogether and transfer all the outpatient services to a larger system.”

Whether the REH designation would benefit specific hospitals might be “random,” Miller said. The formula laid out in law for the facility payment—which could be key to the program succeeding for rural hospitals—doesn’t take into account each hospital’s specific characteristics, such as their patient population and finances. Instead, each participating facility would receive the same amount of money.

While an REH designation might be beneficial to some hospitals, particularly those that are already looking to scrap inpatient services, “there’s no solution for the others in this situation,” Miller said.