If rural and community hospitals as a group are feeling beleaguered these days, their concerns are not misplaced. As more and more elements of the Affordable Care Act (“ACA”) come into effect and/or are better understood, the potential negative impact on hospitals is becoming clearer. Several aspects of the ACA impose new limitations on rural and community hospitals’ operations, reduce reimbursement rates and threaten the very existence of the hospitals. The (typically) small size of community hospitals and the size limits on Critical Access Hospitals (“CAHs”) provide little margin for error. Their geographic location and the regulatory-based limitations on size leave them with limited tools and options to address the impact of health law changes.
Some of the more significant actual and potential impacts of the ACA on rural hospitals include:
- Efforts to withdraw CAHs designation for certain hospitals deemed unnecessary for maintaining access to health care.
- A new CMS requirement for CAHs that, upon admission of a Medicare patient, the admitting physician certify that the patient will be discharged or transferred within 96 hours.
- Deep medicare-related cuts, including bad debt reimbursement and sequestration-related cuts.
- The possible reduction of reimbursement rates from “cost plus” to “cost” for CAHs.
Rural and community hospitals are also facing increased competition from larger health systems which are expanding into their service areas.
As a result of some or all of these issues, affected hospitals are confronting shrinking revenue, which, in turn, causes cash flow challenges. The cash flow issues create immediate problems, including physician- and employee-recruiting and retention problems, vendor disputes and credit agreement defaults. The revenue and cash flow issues also raise long-term issues, including the survival of the institution.
What to do?
For a hospital experiencing operational or financial challenges – caused by ACA-related changes or otherwise – options are often limited, but not necessarily straight-forward or obvious. Affiliations or joint ventures with other institutions are two obvious solutions, but may raise governance or other issues. Mergers or outright sales present more definitive solutions, but at the cost of independence and local control of healthcare service delivery. Recapitalizations and restructurings present both rewards and risks. A financial restructuring, sometimes accomplished through a bankruptcy proceeding, offers the opportunity to reduce debt, terminate burdensome contracts and leases, and implement operational changes. The negative impact of a bankruptcy proceeding, particularly on admissions, does create risks for hospitals utilizing the process.
A further limiting factor for hospitals facing operational or financial challenges is the time constraint under which they must implement a fix. The ACA has accelerated the trend towards consolidation. Larger institutions are looking for new markets; smaller institutions are looking for the safety of size. Those rural and community hospitals not moving quickly enough face the risk of being shut out and isolated.
As a result, for a hospital confronting financial or operational challenges, the most significant factor in determining success is timeliness. Those institutions that identify the issue, confront it early and are open-minded about potential solutions have a much greater chance of success. Put more concretely, a hospital that regularly measurers its performance and compares it with industry benchmarks will recognize a problem sooner than one that does not. An institution prepared to consider all alternatives, rather than limiting itself to only certain options, will find the appropriate path. And the hospital that commits to a solution and utilizes the necessary tools will achieve greater success than the hospital that drifts and allows outside events to determine its fate.