Institutional Alternatives to the Rural Hospital

By Christianson, John B.; Moscovice, Ira S. et al. | Health Care Financing Review, Spring 1990 | Go to article overview

Institutional Alternatives to the Rural Hospital


Christianson, John B., Moscovice, Ira S., Wellever, Anthony L., Wingert, Terence D., Health Care Financing Review


Institutional alternatives to the rural hospital

Introduction

In June 1988, the Montana Hospital Research and Education Foundation (affiliated with the Montana Hospital Association) received a 1-year planning grant from the Health Care Financing Administration (HCFA) to design a demonstration and evaluation of a new category of rural health care facility, which it called the medical assistance facility (MAF). The MAF is one of several similar institutional alternatives to the hospital that have been proposed for sparsely populated rural areas. In this article, we identify and discuss the organizational and public policy issues raised by these alternatives. As a context for our discussion, we first review the motivation for introducing a new type of acute care inpatient facility in rural areas. Then, we focus more narrowly on specific issues that are important in the design and implementation of institutional alternatives to rural hospitals. These issues include: licensure and certification, scope of services, personnel, quality of care, quality assurance, and payment.

Background

It is well known that many very small, isolated (sometimes called cfrontier") rural hospitals are now facing severe economic pressures (American Hospital Association, 1987). For the past few years, Medicare's prospective payment system (PPS) has been seen as the primary source of these pressures, and there is evidence to support this view. On average, rural hospitals receive 41 percent of their revenues from Medicare, so Medicare payment policies obviously have a major impact on the financial viability of these institutions (American Hospital Association, 1987). Rural hospitals argue that prospective payments are insufficient to cover their costs, that their volume of patients is insufficient to average risks under prospective payment, and that price increases have not kept pace with increases in the price of their inputs. The data do suggest that small rural hospitals fared worse initially under PPS than did larger rural facilities. In 1985, hospitals with 6-24 beds reported net patient margins of -- 15 percent and hospitals with 25-49 beds reported margins of - 6 percent. Rural hospitals with 50-99 beds had margins of - 1 percent, while larger rural hospitals reported positive margins (American Hospital Association, 1987). The situation for rural hospitals improved somewhat in the second year of PPS, but one-third of rural hospitals still experienced negative payment margins (Guterman et al., 1988).

Isolated rural hospitals qualify for "sole community hospital" (SCH) status under PPS if they were labeled as such under previous Medicare reimbursement rules or are located 50 miles from another hospital or local topography limits accessibility to their services. Rural hospitals that elect SCH status are paid at 75 percent of hospital-specific costs and 25 percent of prospectively determined rates per admission (Freeman and Cromwell, 1987). Base payments can be adjusted to reflect changes in costs resulting from new facilities or services, and SCH's can receive a one-time additional payment if they experience discharge decreases exceeding 5 percent of discharges in the previous period. Despite these considerations, SCH status has not always proved an attractive option for rural hospitals. The hospital-specific portion of the SCH rate was calculated for each hospital using 1981 data and then projected for the first year of PPS using an inflation index. Since that time, increases in the hospital-specific portion of the rate have occurred annually but, in the view of rural hospitals, have not kept pace with inflation in the costs of their inputs. At the same time, there has been a steady decline in admissions; hospitals with less than 50 beds experienced an average decline of 22 percent from 1983-85, compared with an average decline for all hospitals of 8.4 percent (Guterman et al., 1988). …

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