A Path Forward: CLA’s Simulations on Rural Emergency Hospital Designation

Since 2005, 181 rural hospitals have closed — 138 of those happened in 2010 and later. That’s according to research from the Rural Health Research Program in conjunction with the Sheps Center for Health Care Research at the University of North Carolina.

COVID-19 could have been another blow to rural hospitals, but the influx of Provider Relief Funds and other federal pandemic-related assistance has helped temporarily stabilize finances. When those funds are gone, what does the future look like for rural hospitals? What are the options for the future?

One strategy to consider is a new designation coming online January 1, 2023: The rural emergency hospital (REH). Enacted in the Consolidated Appropriations Act, 2021 (CAA 2021) and signed into law on December 27, 2020, an REH is designed to financially stabilize rural critical access hospitals (CAHs) or rural prospective payment system (PPS) hospitals with fewer than 50 beds that may otherwise have to close.

Depending on resolution of key issues, CLA analysis and simulations suggest that more than 600 critical access hospitals may benefit financially from REH Status.

Our modeling shows that more than 600 CAHs, depending on different variables, could benefit from the new designation. These facilities could see an average margin increase of $1.6 million to $2.3 million.

Struggling rural hospitals

Rural hospital closures have been an ongoing issue due to location, declining volumes, and lack of scale. Because of their distinct circumstances, specific Medicare designations were created to provide additional reimbursement, but even those necessary payments were not enough.

Of the 181 closed hospitals, the Sheps Center research showed that nearly 75% of those were either rural PPS hospitals or CAHs — 73% and 64%, respectively — with another 30 being Medicare dependent hospitals.

The closures are one reason the U.S. House of Representatives Ways and Means Committee requested the Medicare Payment Advisory Commission (MedPAC) research and report on rural access to health care. MedPAC’s interim report on the subject was released in June 2021 with the final due to Congress by June 2022.

Among the findings, rural closures were linked to:

1. Lost market share compared to other hospitals
2. Fewer Medicare beneficiaries using hospital services
3. Inpatient admissions declining significantly prior to closure

In its research MedPAC interviewed hospital leaders and staff. Their findings from those virtual site visits and other research also revealed that before closing, these facilities saw “… large declines in inpatient admissions across all payers in the years before closure. Most of this decline was attributable to patients bypassing their local hospital in favor of other hospitals.” At the same time, patients were still using the emergency department and other outpatient services.

Of note, both the MedPAC and Sheps Center research shows that only 99 of the 181 closures were fully closed. In other words, 82 hospitals were converted into urgent care centers or other, non-acute care hospitals.

Cue the REH.

CLA REH simulations

Experience and research show a need for a different hospital model in rural America. We believe there will continue to be rural hospitals who see similar patterns as those that have already closed or converted. We also expect other facilities, perhaps health systems, to consider converting one (if they have multiple) of their rural hospitals to REH status.

To better assess which hospitals may benefit from conversion, we undertook a modeling approach based on REH reimbursement as we know it using several larger assumptions and four simulation methods (see tables below).

Under law, an REH will receive a monthly average facility payment (AFP) plus additional payments based on relevant fee schedules.

• AFP — The AFP is prescribed under CAA 2021 to be set at an amount equal to the difference in the national CAH benefit in 2019 payments to all CAHs, less what those CAHs would have been paid under the inpatient PPS, outpatient PPS, and skilled nursing facility-PPS, divided by the total number of CAHs. This per REH amount would then be divided by 12 and distributed monthly. For our simulations, CLA analyzed claims level detail to estimate an average AFP. The statute indicates the 2023 base AFP will then increase by the hospital market basket for 2024 and forward.
• Outpatient fee schedule — An REH is reimbursed at the outpatient PPS rate plus 5%. Our model used actual claim level detail by provider to determine an estimate of what those payments would be under REH status.
• Skilled nursing units — An REH is allowed to continue to have a skilled nursing unit and payments would be set at the skilled nursing facility (SNF) PPS rates. For our model, we leveraged our comprehensive CLA Clarity model for SNFs to develop an average SNF payment driven payment model (PDPM) rate for each state.

In addition, an REH may qualify for an exception to the payment limit for rural health clinics, if it operates off-campus provider-based clinics and is a qualifying originating site for telehealth purposes.

The two large assumptions we worked into our simulations relate to these unresolved issues:

• Swing bed payments — REH statutory language is silent on the issue of swing bed payments and whether those will be included in establishing the AFP. Our simulations model both scenarios.
• 340B program benefit — Many hospitals depend on 340B savings, but it is still to be determined if 340B status continues for REHs. We model both.

TABLE 1: Critical Access Hospitals Potential Net Financial Benefit as REH
# of Critical Access Hospitals	All CAHs	< 2 IP ADC	Median REH benefit % of op rev*
Simulation 1: Increased net revenues (1)	68	68	5.9%
Simulation 2: Simulation 1 adjusted for reduced IP costs — increased margin potential (2)	623	404	7.0%
Simulation 3: Increased margin potential (simulation 2 with min ER cost) (3)	474	269	6.3%
Simulation 4: Simulation 3 increased margin potential if lose 340B (4)	343	219	4.9%
Notes regarding CLA analysis simulation models: (1) Simulation 1: Net revenues as REH after incorporating lost inpatient and swing bed revenues (all payers), $2.5 million AFP and 105% Medicare OP PPS reimbursement. Facilities with attached SNFs included PPS revenues for swing bed days based on YE 2020 state level average PDPM rates. (2) Simulation 2: (1) Impact above plus adjustments for IP-related costs (nursing, supplies, drugs) (3) Simulation 3: (2) Impact above plus allowances for minimum 24/7 emergency room physicians and staff coverage costs (4) Simulation 4: (3) Impact above less expense impact of loss of 340B status based on 40% average 340B savings * Median REH margin impact based on CLA facility impact simulation. Operating revenues based on cost report year 2020 reporting revenues per G Series (swing bed payments included in establishing the AFP)

As reflected in table 1, methods 1 – 3 build on each other and include savings under the 340B drug program plus swing bed payments included when setting the AFP. Simulation 4 specifically looks at CAHs that participate in the 340B program but would lose those savings as an REHs.

Simulation 2 shows the most beneficial scenario: a maximum of 623 CAHs could potentially see a 7.0% margin bump as an REH assuming an average facility payment of $2.5 million. This outcome includes swing bed payments in setting the AFP along with retaining 340B program savings. If we think about the research from earlier that shows low daily census as a key precursor to potential closure, under simulation 2 and using an ADC of less than two, there are 404 CAHs that could benefit. Under simulation 1, 68 hospitals could see a net revenue benefit.

Table 2 uses the same four simulation methods but excludes swing bed payments when setting the APF. Even then, under simulation 2, 334 CAHs could potentially a 5.9% margin benefit with an average AFP of $1.39 million with 340B status. Again, looking at low daily census, under simulation 2 and an ADC of less than two, 210 CAHs would benefit. Under simulation 1, there are 11 with a potential net revenue increase.

TABLE 2: Critical Access Hospitals Potential Net Financial Benefit as REH (Assuming Swing Bed Not Incorporated Into AFP)
# of Critical Access Hospitals	All CAHs	< 2 IP ADC	Median REH Benefit % of Op Rev*
Simulation 1: Increased net revenues (1)	11	11	4.4%
Simulation 2: Simulation 1 adjusted for reduced IP costs — increased margin potential (2)	334	210	5.9%
Simulation 3: Increased margin potential (simulation 2 with min ER cost) (3)	227	108	5.9%
Simulation 4: Simulation 3 increased margin potential if lose 340B (4)	136	76	4.0%
Notes regarding CLA analysis simulation models: (1) Simulation 1: Net revenues as REH after incorporating lost inpatient and swing bed revenues (all payers), $1.39 million AFP and 105% Medicare OP PPS reimbursement. Facilities with attached SNFs included PPS revenues for swing bed days based on YE 2020 state level average PDPM rates. (2) Simulation 2: (1) Impact above plus adjustments for IP-related costs (nursing, supplies, drugs) (3) Simulation 3: (2) Impact above plus allowances for minimum 24/7 emergency room physicians and staff coverage costs (4) Simulation 4: (3) Impact above less expense impact of loss of 340B status based on 40% average 340B savings * Median REH margin impact based on CLA facility impact simulation. Operating revenues based on cost report year 2020 reporting revenues per G Series

As our analysis suggests, large variables impact the ultimate benefit of conversions, including clarifying swing bed cost-based reimbursement in setting the AFP and retaining 340B status, which is an important factor in net financial implications of any potential conversion.

To further illustrate this point, the following chart, broken down by inpatient average daily census (IP ADC), shows the percentage of CAHs that have net benefit with and without 340B status.

 

How we can help

The first step to evaluating an REH conversion is to understand the designation, its payment methodologies, and your specific situation. While we have modeled various scenarios, REH consideration will be custom to each hospital and based on many financial and non-financial considerations. It is not too early to start planning.

Using our CAH Gold Standard Report, other data analytic capabilities, and deep industry specialization and market knowledge, we are able to dive in deep to help you assess how the REH model (or any other change) could work for your organization.

From strategic planning to financial modeling and beyond, CLA knows rural. Our health care team works with over 620 hospitals and health systems, and our reimbursement leadership team has more than 70 years of experience focusing exclusively on rural providers.