Updated Rural Emergency Hospital Analysis — Will $3.2 Million Be Enough?

In our February 8, 2022, article, A Path Forward, CLA analyzed the rural emergency hospital (REH) designation prior to the release of the Centers for Medicare & Medicaid Services’ (CMS) proposed regulations. Now that the REH financing proposals have been released, we take a fresh look at our simulations and review potential barriers and considerations on REH conversions.

Background: REH proposed financing mechanisms

In the calendar year (CY) 2023 Outpatient Prospective Payment System (OPPS) rule, CMS outlines its approach for REH’s reimbursements and the annual facility payment (AFP).

CMS uses the term “rural emergency services,” as contained in the underlying statute, to identify what is reimbursed under the OPPS with the additional 5% bump. If reimbursable under the OPPS, then CMS will reimburse at 105%. While other items and services may be provided by an REH, CMS does not believe it can add the 5% bump to those, as they do not fall under rural emergency services. Rather, CMS proposes those will be reimbursed under their respective fee schedules.

Rural Emergency Services	Other Allowable Services
Reimbursed at OPPS rate plus 5%	Services not covered under OPPS (non-rural emergency services) paid at respective fee schedule
Exempt from off-campus provider-based departments reductions	No 5% bump applied

The underlying statute sets the AFP calculation as the total amount of 2019 critical access hospital (CAH) payments minus what they would have been if paid under the prospective payment system (PPS). That number is then divided by the number of CAHs nationally and then divided by 12 for a monthly amount. CMS proposes this calculation to equal $3.2 million for each REH or $268,294 per month.

Annual Facility Payment Calculation
STEP 1: Total amount of 2019 CAH Medicare spending minus what it would have been under PPS	STEP 2: Difference from Step 1 divided by total number of CAHs
$12.08 billion (CY2019 CAH actual)  $7.68 billion (CY 2019 if PPS)	$4.4 billion (Step 1 difference)  1,368 (number of CAHs in 2019)
= $4.40 billion (difference)	= $3.2 million annual per REH ($268,294 monthly)

We expect the OPPS’s 5% bump to translate into roughly $50,000 – $100,000 annually, depending on types of service and quantity. Therefore, it’s the annual $3.2 million that will be a determining factor in considerations.

REH simulations

Our previous simulations from February 2022 estimated an AFP at roughly $2.5 million and found that 68 CAHs could potentially benefit from an REH conversion when looking only at increased net revenues (simulation 1). With an AFP of $3.2 million, our new simulation shows potentially 160 CAHs could benefit under simulation 1.

Annual Facility Payment Calculation
Simulations	All CAHs	All PPSs	< 2 IP ADC
Increased net revenues (1)	160	56	91
Increased margin potential (2)	756	111	142
Increased margin potential (min ER cost) (3)	656	111	125
Increased margin potential — lose 340B (4)	512	101	116

Notes:

(1) Higher net revenues as REH after incorporating lost inpatient revenues (all payers) and $3.2 million REH facility payment. Facilities with attached SNFs included PPS revenues for swing bed days based on YE 2020 state level average PDPM rates.
(2) Includes adjustments for IP-related costs (nursing, supplies, drugs) as well as reductions in dietary and laundry costs where applicable
(3) Includes allowance for minimum 24/7 emergency room physician and staff coverage costs
(4) Assumes benefit of 340B status eliminated based on 40% average 340B savings

If we remove the benefit of the 340B program from simulation 1, the number of hospitals that could see increased net revenues as an REH drops to 126. As with our previous simulations, even more hospitals could possibly benefit from a conversion when looking at an increased margin potential, depending on various assumptions.

We also ran our four simulations for rural prospective payment system hospitals with fewer than 50 beds. We found that 56 of these small PPS hospitals could benefit from a conversion if looking at increased net revenues (simulation 1) and up to 111 could benefit under simulations 2 and 3.

Because not all PPS hospitals qualify for the 340B program, loss of 340B status had less impact in PPS analysis than it did with the CAH analysis. For these rural PPS hospitals, removing 340B under simulation 1 takes the number from 56 down to 54.

Since previous research has shown that many closed or converted rural hospitals had small average daily census (ADC), we also looked at the ADC for our population of hospitals. Interestingly, if we only look at ADC then only 91 (both CAHs and PPS) could see increased net revenues under simulation 1 compared to 216 when not taking ADC into consideration. In other words, some hospitals with higher ADC levels would potentially still benefit with a conversion.

Conversion considerations

Due to the newness of the REH, some may be wary to consider it. When the CAH designation was created in 1997, some existing hospitals were concerned with how the community would respond to a conversion or that the government would ultimately take cost-based reimbursement away (i.e., too good to be true). That led to a smaller number of CAH early adopters. As time went on, most rural hospitals converted, many under what was called “necessary provider” status, which ceased by 2006. Some hospitals failed to convert prior to 2006, and now do not qualify.

Though similar concerns arise with the REH — from community perception to fear the government will cut the AFP down the line — rural communities now strongly support their CAHs, and cost-based reimbursement did not go away. That said, here are some immediate issues that will likely be raised when considering the REH:

• Cost-based reimbursement — For CAHs, moving from cost-based to prospective payment system is a significant decision.
• 340B program status — Unless Congress intervenes, REHs would not be eligible for the 340B program. Many CAHs depend on the benefits of the 340B program.
• Post-acute beds — Hospitals that use post-acute swing beds receive higher reimbursements, which would be reduced to the SNF PPS rate under the REH.
• Workforce/operations changes — One of the reasons Congress created the REH is because many rural hospitals have closed in the past decade, partly because inpatient care requires higher levels of services and staffing (both patient care and non-patient care staff). An REH would not need to staff for or provide the same level of services.
• Community impact — Rural hospitals are part of the fabric of their communities and often one of the largest employers. The impact on the community and community perception is always a factor.

Analysis

The unfortunate reality is that 182 rural hospitals have closed since 2005, according to the Sheps Center for Health Care Research at the University of North Carolina. While 99 were complete closures, 83 were “converted” closures — which means they still provide some health care services but no longer provide inpatient care (exactly the situation for which the REH was created). If the REH had existed then, perhaps some of the complete closures could have remained open.

If we circle back to our analysis, will hundreds and hundreds of hospitals convert to an REH in the near term? Probably not, but our analysis puts numbers to policy and helps explore different simulations where conversion may make sense in the future.

In the near term, we expect early adopters will likely have one or more of the following:

• Need for increased net revenues (simulation 1)
• Low inpatient daily census (or trending in that direction). Staffing for inpatient care when there are one or two patients per day is costly. The REH can be an alternative.
• Financially struggling or on verge of closure. Hospitals already under financial duress, especially post-COVID, may be able to stabilize as an REH while maintaining important access to care locally.
• Total revenues of less than roughly $13 million. The $3.2 million AFP may provide important infusion of funds for smaller hospitals.
• Be part of a health care system that has other hospitals in close proximity.

Conversions are not to be taken lightly, but the REH statute does have a failsafe and allows for conversion back to the original designation (CAH or PPS).

How we can help

Our simulations provide a broader lens for these discussions. Even if you aren’t necessarily looking to convert, reviewing and modeling out the REH is an opportunity for due diligence on the changing rural hospital landscape.

If you are interested in learning more or seeing how the financial model could look for you, CLA’s health care team can help. Our reimbursement leadership team has more than 70 years of experience focusing exclusively on rural providers.