Rural health care post-pandemic: Part 1 – Declining revenue for rural hospitals

Rural hospitals are waging war on declining revenues on two fronts: the shift in payment philosophy and the lack of patients during the pandemic.

By Kelly Asche

Before the COVID-19 crisis began, the Center for Rural Policy and Development was gathering information and analyzing the impacts mergers and acquisitions among health care providers have been having on access in rural areas. We were a few weeks away from releasing a report before the pandemic threw everyone’s lives upside down. While we adapt the report to this new reality, we will be releasing parts of that research while also bringing into focus how the COVID-19 response is magnifying the issues we identified in the original research report. It’s likely that access health care services and the health of our health care providers will be a significant conversation over the next year.

To watch a webinar presenting this research and a Q&A with healthcare experts, click here.

It may seem crazy to think that in the middle of the COVID-19 crisis, there are hospitals and clinics in Minnesota that are laying off workers because business is “too slow.” Only five weeks ago, the need for health care workers was at its highest level in years. But recently, Duluth-based Essentia Health, the major health care provider for northeastern Minnesota, laid off 500 workers.

These workers were non-medical employees, but they are a symptom of a bigger problem facing Minnesota’s health care system: How to build a system that is effective, efficient, and financially sustainable. It’s a puzzle the health care world was working through before COVID-19, but in the past few weeks, measures taken to stop the spread of the virus, while necessary and even life-saving, have thrown the ongoing financial strain on the state’s health care system into sharp focus, especially for rural hospitals and clinics.

Health care’s shifting financial model

The COVID-19 crisis has put the importance of health care front and center in our minds. Hospital preparedness, transportation for sick patients, and the safety of our health care workers are the most important pieces right now. At some point soon, though, we will turn our attention back to the critical question health care was struggling with before: the financial state of our small rural hospitals.

The key bit of context needed when discussing finances in the health care system is the significant shift in payment philosophy that America was already undergoing. Since the very beginning, payment for health care in the U.S. has been based on a “fee-for-service” structure where hospitals, physicians, specialists, etc., were paid based on the number of services they provide or the number of procedures they order. The argument against this “heads-in-the-beds” business model is that payers are billed for every step of the patient’s treatment, even if some of the services or procedures are unnecessary, duplicative, or supported by evidence-based data. The overall costs of health care grew astronomically to the point where research was showing that Americans were paying the most for health care while having some of the lowest outcomes.

Over the last 10 to 20 years, governments, insurance carriers, and the entire health care industry have begun shifting toward a different model known as “value-based payment.” Under this new model, health care providers are reimbursed for the quality and efficiency of the care they are providing, incentivizing the care providers to consider “best-practices” and look for best outcomes when treating patients. Research has shown that efficiency and quality increase when care is holistic. A holistic approach requires physicians and care providers to coordinate and communicate across specialties. This shift was being implemented slowly over the last few years and will continue in the future as the country attempts to limit the cost increases in health care.

To keep up with this model, hospitals need to implement strategies that drive up efficiencies and drive down costs, while increasing quality using four core methods.

  1. Risk sharing: Since hospitals would no longer be reimbursed on a single-patient level, total revenues and expenses at the aggregate level are very important. Hospitals now need to make sure their patient pool is large enough so that a few expensive patients won’t throw off their entire business model. The larger the patient pool, the more they can spread that risk around.
  2. Technology investments: Since this shift requires hospitals to be more business-savvy, sophisticated analysis requires detailed data. In fact, the ACA required hospitals to implement Electronic Health Records not only for ease of sharing among hospital staff within and outside their own system, but also to conduct analytics on their patient pool and provide a solid business model. Beyond just record keeping, quality and efficiency are driving hospitals to find technology that can provide more sophisticated care.
  3. Enhancing coordinated care: The new value-based payment philosophy offers incentives for hospitals to coordinate care across multiple service areas and make sure the patient has access to a continuum of care that is both preventative and reduces in-patient admissions.
  4. Find efficiencies: Finally, and most importantly, this shift has incentivized hospitals and clinics to find efficiencies, for example, by eliminating administrative positions, consolidating services into one location, eliminating duplication and allowing hospitals to purchase supplies in bulk.

Impacts on smaller hospitals

For small rural hospitals, a lack of economies of scale just magnifies their problems. Low patient volume makes it harder to spread risk around. Attracting specialists is a continual challenge for rural providers. Upgrading technology and equipment is expensive, making it difficult to conduct analyses that could provide better outcomes for patients. Their purchasing power is lower, increasing their costs, and they have less leverage with insurance companies to negotiate higher reimbursement costs. The administrative complexity is increasing throughout the industry, and smaller hospitals struggle to keep up with technology advancements and staffing to support these activities. They also tend to have significantly higher percentage of their patients on Medicare and Medicaid, which reimburse at lower rates than private insurers (Figure 1).


Figure 1: The percent of charges to a public program such as Medicare or Medicaid increases as a hospital becomes more rural. Learn more about RUCA county groups here. Data: MN Dept. of Health | Health Economics Program – Hospital Annual Reports


All these issues facing rural hospitals and health care providers in general typically translate into poor financial performance. In 2018, hospitals located in the entirely rural areas of the state averaged a 0.1% profit margin (profit or net loss divided by total revenue). In contrast, hospitals in entirely urban counties averaged a profit margin of 6.2%. Not only are margins significantly lower the more rural a hospital is, but the probability that they have an “unhealthy” margin (4% or less) increases. In 2018, 69% of hospitals in entirely rural counties had unhealthy margins while only 32% in entirely urban counties did (Figure 2).


Figure 2: Margins are profit or net loss divided by the total revenue for each hospital. Margins typically decrease as a hospital’s location becomes more rural. An unhealth margin is considered to be less than 4%. In addition to lower margins, rural areas tend to have more hospitals with unhealthy margins. Learn more about RUCA county groups here. Data: MN Dept. of Health | Health Economics Program – Hospital Annual Reports


What does this mean post-COVID-19?

The largest impact the COVID-19 crisis is having on hospitals where there aren’t a large number of COVID-19 patients is the complete shut-down of their typical revenue streams. Hospitals and clinics are reporting significantly fewer patients coming through their doors due to several factors: i) patients fear going to a health care facility due to the spread of COVID-19, ii) significantly fewer accidents and injuries since more people are staying indoors or at least not traveling, iii) the closure of specific services like physical therapy as hospitals and clinics prepared for any COVID-19 surge that may appear, and iv) the elimination of elective surgeries and other services that are typically considered “high-revenue” generators.

The situation is particularly frightening for smaller, more rural hospitals, where margins were already very thin. Essentially, smaller hospitals are waging two fights against declining revenue: the resulting patient decline due to the pandemic, and the shifting payment philosophy.

State and government programs have been set up that hospitals can tap to help fund the response to COVID-19, but only for money that has already been spent, not for future expenditures. Unfortunately, many hospital administrators say that there will not be enough funding to go around and that that funding will likely go, and rightly so, to hospitals that have had the largest volume of COVID-19 patients.

This will likely leave rural hospitals in a significantly worse situation than before the crisis began. As policymakers develop more legislation to help support our health care providers, here are a few things to consider.

  1. All health care providers are making financial sacrifices regardless of their volume of COVID-19 patients. Funding for hospitals on the front lines should be priority 1, but we also need to keep in mind that other hospitals, especially smaller ones, were already stretched thin financially and are now taking a massive revenue hit.
  2. At a time when economic stimulus and economic development will be front and center, remember that health care occupations are the largest share of the workforce and some of the highest paying jobs in our rural areas across the state. Supporting our smaller health care providers as we get people back to work equals economic development for these regions of the state.
  3. When COVID-19 cases will peak is depends on density, not geography. Although it’s hard to predict, it could be that cases in the Twin Cities area and other larger population centers will reach their peak well before it peaks in rural Minnesota. In this case, smaller, rural hospitals may be dealing with this crisis for much longer than other, larger metropolitan areas.
  4. It will be worth exploring all of the ways the state can support our smaller hospitals outside of just grant funding. Temporary regulatory relief, rate increases, and other methods can be used to increase revenue streams for a specific period of time until these providers are back to where they were financially.