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How to fix the cash flow problem that makes rural healthcare unsustainable

Reuters/David DeNoma
Take care.
  • Annalisa Merelli
By Annalisa Merelli

Senior reporter based in New York City


When Covid-19 hit Florida in June—rapidly climbing from under 700 new cases a day to over 10,000 within a month—the state could count on 12 critical access hospitals to serve its rural population.

Only a month later, two of them–in Live Oak and Starke, both near the Georgia border—had closed everything but their ER services.

It wasn’t Covid that sunk them. It was their payment models.

By and large, US healthcare is set up to generate profits. Put simply, the more services a patient purchases, the more money the provider makes. But while billing for each service provided is often very lucrative for large urban hospitals with a steady stream of patients, it leaves rural hospitals unable to predict their cash flow and plan their finances.

The Florida hospitals’ closures had already been announced in February, and it followed a script that has led more than 170 of the 2,000 rural hospitals in the US to close in the past decade. Low reimbursement rates from government insurance and a high percentage of bills left unpaid—especially for expensive emergency treatments—means most rural hospitals barely have more than a month’s worth of cash flow. The closure of outpatient services and elective treatments brought on by coronavirus only exacerbated the problem.

This is detrimental to the communities the hospitals serve, for two reasons: First, of course, it puts the population at higher health risk, particularly considering that the majority of rural Americans already have precarious access to healthcare. Secondly, it takes away jobs—and the local hospital is typically one of the largest employer of a rural area, and often the largest.

But a new approach being tested by 13 rural hospitals, part of the Pennsylvania Rural Health Model (PRHM), might be able to fix that. The model, a pilot program sponsored by the US Centers for Medicare and Medicaid Innovation (CMMI), offers a different way to manage rural hospital finances, with the goal of providing financial stability and predictable funds. The program also has the nice side effect of changing the overall approach to healthcare in a way that can improve the health of the community.

A new way of paying

“It’s the payment system that got us stuck. The functional paradigm of the current system is maximize sick care utilization, maximize price, and minimize cost,” Eric Shell, a healthcare consultant who specializes in rural hospital issues for the federal Office of Rural Health Policy, told Quartz.

Typically, US healthcare works on a fee-for-service model: a hospital first provides a service, then it bills the insurance and the patient. Large urban hospital and big hospital chains can make a lot of money this way: A large percentage of their patients carry private insurance which reimburse at higher prices for services than government insurers like Medicaid or Medicare, and their emergency rooms (which are very expensive to operate) are used a lot less as an alternative to regular care, with lower costs for the hospital at the time of service.

Things are different for rural hospitals, that operate on small margins, and this system can create a lot of uncertainty. The revenue of the previous month, for instance, might not be enough to front the expenses needed to provide the services required this month.

But what if a hospital could count on a predictable stream of income? Enter the so-called “global budget,” the system at the core of the Pennsylvania experiment. The initiative was established in 2017 with a $25 million investment from the CMMI,  which started operating in 2019 with five hospitals, and expanded to the current 13. The pilot program, which will continue till 2024, is aiming to involve up to 30 of the 67 rural hospitals of Pennsylvania.

This is how it works: Under the global budget, insurers—commercial ones as well as Medicare and Medicaid—don’t pay the hospital per each claim, but in monthly installments. The total is based on the average historical revenue of the previous years. For instance, if an insurer has paid an average $1.2 million per year in reimbursements for services to a rural hospital, it will pay $100,000 upfront per month—leaving it to the hospital to manage it. Patient accessing the service will still pay their co-pay, but insurance won’t pay extra if there are more claims, nor will it pay less if fewer services are needed.

This payment covers everything from emergency room services, to testing, imaging, inpatient care, although not doctor’s visits, or nursing home care.

From volume to value

While the main goal of the pilot is to test whether the global budget approach can help Pennsylvania’s hospitals financially, it also reframes the whole approach to healthcare. “The purpose of this is not just to provide a continuous cash flow but also it is designed to give a path for hospitals to transform into services that are much more community focused, and really are based off of what the community needs are,” said Karen Murphy, a former secretary of health for Pennsylvania and one of the architects of the model.

“In fee-for-service, [hospitals] get paid for sick care, so they actually need people to be sick to keep their door open; they’re not necessarily motivated to keep people healthy,” said Janice Walters, a CMMI consultant serving as chief operating officer for PRHM, to provide support to hospital in the setup of the program. The global budget approach flips that: Hospitals receive full payment either way, so they are encouraged to invest in services that keep the population healthy, and in less need of hospital services—the hospital gets to keep the savings, so it is incentivized to save.

“The key approach here is to test payment mechanisms that move incentives from a volume-based payment to a value-based payment,” said Clinton MacKinney, a professor of health management at the University of Iowa. The benefits of a model that incentivizes keeping the community healthy, he says, could be especially tangible in rural areas, where chronic conditions, like diabetes or hypertension, which tend to improve significantly with consistent care, are more common than in urban settings.

When hospitals joins the program, Walters explains, they have to commit to a “transformation plan,” indicating how they plan to start making investments in community health to reduce costs. An example, she says, can be treatment for chronic obstructive pulmonary disease (COPD), a set of conditions that includes emphysema and is quite common in rural Pennsylvania due to the high percentage of people employed in the coal industry and the prevalence of smoking.

“In the fee-for-service payment arrangement, pulmonary rehab isn’t really paid for—the reimbursement is really, really bad,” Walters said, “but in a value based delivery system, we actually want to keep those patients with COPD out of our hospital, so [we make] investment in pulmonary rehab clinics, where they can go in and get on exercise machines and really build up the lung function.”

What’s in it for hospitals—and insurances

As it works to improve the overall health of the community, the hospital becomes more integrated into the territory it serves, and more directly in contact with the community it serves. The Fulton County Medical Center in south-central Pennsylvania, which joined the program earlier this year, hired a “population health navigator.” Her role is specifically to reach out to residents who are frequent users of the emergency room for conditions that could be better managed for routine care, and discuss with them better option of care. Through her work, her hospital is also learning about the specific health need of the population it serves, and can adjust its investments accordingly.

“Being on the global budget helps us stabilize the cash flow and keep the focus more on the patient,” said Mike Makosky, the hospital’s CEO. “Of course finances are always going to be a point of focus because we have to maintain viability, but our mission is to take care of the patient and the community.”

There are other practical advantages that could emerge in the longer term, too. For instance, a reduced number of claims to process would significantly cut the need for administrative work, which is often performed by nurses who would instead be able to attend to patients—a key advantage considering rural hospitals face a shortage of nurses and other medical talent.

In order for the model to work, the insurance companies serving the community need to be on board, too. For them, the benefits can be twofold. The model ensures that hospitals can keep their doors open, and that the policy holders have access to care, providing a better value offer for the insurer. And, it also provides some stability in payments, modulating some of the risks that are intrinsic to the insurance industry. “I think anytime that you can minimize the uncertainty it is a positive,” said John Bulger, chief medical officer of Geisinger Health Plan.

Geisinger, based in Danville, Pennsylvania, is participating in the PRHM both as an insurer and as a healthcare provider, with its hospital in rural Lycoming County.

When, as in the case of Geisinger, the insurers also run hospitals, the savings generated by the model are immediately evident. In this case, the system isn’t too dissimilar from what happens in other rich countries, where government programs provide both care and coverage.

But Bulger said the complete integration isn’t necessary for insurers to see the advantages presented by the model, which would only grow in the longer term.

To be sure, this isn’t new. Pharmaceutical companies and insurers have been promoting a value-based approach for quite a while, arguing the US’s current healthcare model is directly linked not just to the exorbitant cost of care in the country, but to its poor health outcomes as well. Several health insurance providers, including Geisinger, have introduced this kind of approach, on a much smaller scale than PRHM, in their contracts with doctors and providers, and got positive results.

While the PRHM is the largest setup targeting rural health so far—and the first of its kind to involve such a broad range of actors—it isn’t the only example of innovative approaches to healthcare payment; the Maryland All-Payer Model, which inspired the Pennsylvania program, moved the entire state’s hospital budget to a global budget with the same rates, set by the state, across payers. The project, which has its roots in a 1970s Maryland law requiring all insurers reimburse the same, started in 2014, and was able to generate significant savings for the system, and for payers, in the following five years.

Many in the healthcare system benefit from these kinds of innovations, but not all would, or are willing to try. It may be easy to convince other rural health systems to follow the Pennsylvania example, should it show significant advantages in terms of financial stability, but it would be much harder to expand such a system to urban hospitals or large, lucrative private hospital chains which make their profits through fees-for-service.

And even among those working in rural health question the principle behind the model. Under the global health model, healthcare providers could discourage patients from seeking care or getting tests in order to save money, said Brian Miller, the CEO of DeWitt Hospital in rural Arkansas. “Everything that incentivizes a business not to see patients is not good,” he said.

Much of the financial struggles of rural hospitals may be avoided by demanding accountability from insurance companies, Miller said, which at the moment have the last word when it comes to denying reimbursement, for their coverage choices.

Corona crash test

Even the most recent round of hospitals to join the PRHM, at the beginning of 2020, couldn’t anticipate the kind of year that was ahead of them. But if the global budget didn’t spare hospitals from some of the trouble brought on by the pandemic, it did provide some relief—providing early arguments to the value of the model.

“In the midst of the pandemic our hospitals still got their payment,” Walters said. “So even though people stopped showing up [for treatments] hospitals were still getting their checks.”

Other eligible hospitals in Pennsylvania have noticed. “Providers are much more interested right now with Covid in having a prospect of payment model and some predictability,” Bulger said. “If you are just getting paid fee-for-service, what happened to some providers is that from a cash flow standpoint they went to zero pretty quickly.”

The model is promising, but it is still no panacea for the health of rural communities. In particular, it doesn’t really solve the financial issues that may arise on the patient’s side: the insured continue to pay their co-pay, no matter how high, and the uninsured remain uncovered.

This could represent an obstacle to the success of the program, as it might be harder to get the whole community to, for instance, get routine screenings and visit if there is a price involved. Nonetheless, the architects of the model say the added benefits would expand even to the members of the community who do not use the hospital services. The advantages of having a healthy community or the employment provided by a hospital extend to those without  insurance. This isn’t perfect, but it’s a step in the right direction because it allows hospital leaders to start thinking in a different way,” MacKinney said.

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