Rural health care preview, part 4: Controlling health care costs on the hospital side

doctor sitting in a hallway

By Kelly Asche

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

State legislators are increasingly looking at controlling health care costs by regulating hospitals, which could increase consolidations of services even more.

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 turned everyone’s lives upside down. As 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 to health care services and the health of our health care providers will be a significant conversation over the next year.

Part 1: Declining revenue for rural hospitals

Part 2: Health care mergers and acquisitions are the new reality

Part 3: What do we mean by “access”?

Despite the promise of a more efficient health care system through mergers and acquisitions, the cost of health care services has remained stubbornly high. In Table 1, the cost for health care increased nearly every year, and on average, 4.5%.

Table 1: The five-year trend in the growth of costs shows rates above inflation nearly every year. Data: MN Community Measurement































Total Cost







Over the last ten years, much of the health care policy developed to improve access and control costs has been focused on the insurance side of the equation. Largely untapped have been policies directed at health care providers.

This is beginning to change, however. States across the country are starting to implement significant policies that either incentivize cost efficiency measures or go as far as even capping the price a provider can charge for specific procedures. But while well intentioned, adding this pressure to hospital systems will likely push them to consolidate services, reducing access in rural areas even more.

State legislative responses to controlling health care costs

There are two ways policymakers can control health care costs, on the health insurance side and on the health care provider side. So far, the focus has largely been on health insurance. At the federal level, the Affordable Care Act introduced policies that prohibited insurance companies from turning down people for pre-existing conditions, for example, while at the state level, Minnesota legislators created a reinsurance fund that insurance companies can tap if that one super-high-cost patient comes along and throws off their expense targets.

The health research and policy group Health Affairs sums up the advantages of implementing health care reforms at the state-level (Emanuel, Sharfstein, & O’Toole, 2016):

  • The policies can be tailored to what works best in their state;
  • States already have considerable authority over insurance markets;
  • States have significant regulatory authority over health care within their borders, including rate review processes, scope-of-practice regulations, physician licensing, antitrust laws, and provider and insurer regulations; and finally,
  • States have the power to bring together stakeholders to discuss reforms.

The National Conference of State Legislatures has compiled a list of reforms states are enacting across the country to contain the growth in health care costs, plus full reports explaining both the research and the challenges of implementing these strategies.[1]

Administrative simplification: Reducing duplication and unnecessary complexity in the health care system can lower costs; for example, promoting standardized paper forms for billing and coding and streamlining government regulations and compliance requirements.

Global payments to health providers: In this payment method, which aligns with the new philosophy of value-based payments, a large provider network receives a global payment instead of a payment for each individual patient or service. The provider is then responsible for care among all of the enrollees. This method of payment is designed to promote cost-effective preventive care, eliminate services considered of questionable value, reduce excess healthcare system capacity, and incentivize efficiency.

Episode-of-care payments: Similar to global payments, episode-of-care payments reimburse providers based on all the care a patient receives throughout the course of treatment for a specific illness instead of paying for each service during treatment. Reimbursements are negotiated so that the payments are less than what each service would be, and at the end of the “episode,” any savings are split between provider and payer. This strategy’s goals are similar to those of global payments: eliminating duplicate or unnecessary services and strengthening incentives for providers to coordinate care.

All-payers health data: Tracking the large trends on what services patients use as they move through the health care system and their health outcomes can help inform cost containment and quality improvement efforts.

Accountable Care Organizations: Multiple providers can collaborate to form an ACO, an entity that acts as an overarching structure. Although not a cost containment strategy, ACOs provide the structure necessary to implement these strategies. For example, health care providers sign an agreement to participate with an ACO. Spending targets are set for the year based on analysis of the previous year’s data. If spending for the year falls below the target, the savings are shared among all the participating providers.

Performance-based health care provider payments: A bonus system that rewards a provider for achieving some pre-established benchmark of quality and efficiency. Rewards can come in the form of monetary bonuses, enhanced fee schedules, or more enrollees directed to high-performing providers. The goal is to address healthcare underuse and overuse and reward efficient and quality care.

Equalizing health provider rates—all-payer rate setting: Hospitals sometimes charge some patients more than others for the same service, which happens when private insurers negotiate higher reimbursements to make up for losses from Medicare and Medicaid patients. Essentially, the rate is set for a service no matter who pays. The goal of this strategy is to eliminate uneven and high health care prices, promote provider price competition, and reduce health plan and administrative costs.

Impacts of cost containment strategies on rural hospitals

What tends to get overlooked, however, is that nearly all these cost-containment policy strategies are unattainable for small, non-merged hospital and will likely impact their ability to provide services in the future.

Nearly all of the strategies to contain costs are unattainable by small, non-merged hospitals.

  • Leadership: Without strong leadership, it may be difficult to get all physicians and specialists to buy in to a new strategy or system.
  • Staffing: Rural hospitals may not have the specialists on staff to provide the broader range of services coordinated care requires.
  • Financial: The cost to update the technology needed to track and analyze data and staffing to run the numbers can range from $350,000 to millions.
  • Geographical: Coordinated care is an integral part of cost-saving strategies, but getting all the physicians and specialists together to meet and discuss patient care can be very difficult when facilities and/or providers are spread out across a region.

The problem that many of the other problems stem from is, of course, the issue of not having a large enough patient pool to bear the financial risk associated with these sorts of strategies. According to Sally Buck, CEO of the National Rural Health Resource Center, “risk analysis shows that a healthy business model requires at least 100,000 patients.”

The other major issue for rural hospitals is that the more rural that hospital is, the larger the number of patients in its pool who will be on Medicare or Medicaid. Any policies requiring hospitals to charge each patient the same amount for the same service will significantly impact the bottom line since the hospital would no longer be able to charge more to private payers to make up for the loss from Medicare and Medicaid payments.

The reality is that small rural hospitals are already running on incredibly small margins, if any at all, and have likely exhausted every avenue to contain costs on their own. Given that hospitals in the state’s most rural counties are on average already operating at what is essentially a zero profit margin, any policy forcing them to take less revenue will likely only result in a net loss.  


[1] Full reports on each topic can be found at