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Testimony on The Potential Crisis Facing Rural Hospitals and the Impact on Rural Communities by Claude Earl Fox, M.D.
Administrator, Health Resources and Services Administration
U.S. Department of Health and Human Services

July 14, 1999

Senator Cochran, Senator Kohl, members of the Subcommittee - thank you for inviting me to testify today about the current plight of rural hospitals and the impact this might have on our rural economies. This is a topic that is close to my heart. I was born in a rural hospital, grew up in a small rural town and have worked in and with rural communities most of my life. During my time as the State Health Officer in Alabama, I chaired the Alabama Task Force on Rural Hospitals and was part of an important effort there to help champion the critical role these facilities play in their communities.

Rural hospitals are the anchors in our small towns and communities. First, these facilities are the primary source of health care in the community and can help attract the physicians and other health care providers that are often so difficult to find in rural areas. These facilities are often surviving on very thin operating margins and have had to diversify their services to survive. We know that:

• 100 percent of rural hospitals provide outpatient services
• 59 percent of rural hospitals operate home health agencies
• 72 percent of rural hospitals have either a home health agency or a skilled nursing facility or both
• 21 percent of rural hospitals operate an outpatient center, a skilled nursing facility and a home health agency.

This diversification has helped rural hospitals to continue providing needed care to their communities. Unfortunately, given their low volume of patient visits and stays, these facilities are very dependent on each of these services to make ends meet.

But rural hospitals play a much larger role in their local communities than simply providing health care services. They are often among the largest local employers and a bellwether of the economic health of a small town. Research shows that the health sector provides 10 to 15 percent of the jobs in many rural counties, and that if the secondary benefits of those jobs are included, the health care sector accounts for 15 to 20 percent of all jobs. On an individual employer basis, hospitals are often second only to school systems as the largest employer in rural counties. Studies on industrial and business location also conclude that schools and health services are the most important quality-of-life variables in these decisions. A strong rural hospital can be a solid foundation for a strong small town with a diversified local economy and can serve as a magnet for other economic development. Conversely, a struggling rural hospital or the closure of a small rural hospital can often have the opposite impact on a small town through lost jobs and disincentives for businesses to locate and grow.

When you look at all of these factors together, it=s clear to see the importance of maintaining the economic health of our nation=s rural hospitals. This is a growing concern in light of the many changes brought about by the Balanced Budget Act of 1997. Consider the following numbers:

• A greater percentage of rural residents are Medicare beneficiaries, compared to urban residents (18 percent vs 15 percent);
• Medicare payments account for 39 percent of rural hospital inpatient revenue and it can reach as high as 80 percent of inpatient revenues for small rural hospitals;
• 50 percent of all patient days in rural hospitals are from Medicare beneficiaries, compared to 37 percent in urban hospitals;
• And finally, total Medicare payment per beneficiary is nearly $1,000 less for rural beneficiaries than for urban beneficiaries.

As you can see, changes in Medicare payments from the Balanced Budget Act could have a significant impact on the health care infrastructure of rural towns all across America. My colleague from the Health Care Financing Administration (HCFA) will describe some of these reforms in more detail, but I can assure you, however, that the Department is closely monitoring the impact of these changes. Further, there are a wide range of Federal programs that directly address the unique health care needs of rural hospitals and rural communities. For example:

• Starting this year, the Health Resources and Services Administration (HRSA)C through the Office of Rural Health PolicyCwill administer the new $25 million Rural Hospital Flexibility program. These grants, which will be given to the individual state offices of rural health, will provide states with up to $800,000 to support network development and stabilize their small rural hospitals by helping them consider, plan for, and obtain designation as a ACritical Access Hospital.@ These CAHs can strengthen their outpatient, primary care and emergency services while maintaining a limited inpatient capacity. To help them financially, the Federal government will pay on a cost basis for care delivered to Medicare patients. It is our hope that these new CAHs can become the hub of a revitalized rural health system.

• The Office of Rural Health Policy is located in HRSA but has a Department-wide responsibility for advising the Secretary on the impact of Department=s policies and regulations on rural communities. This office is working with HCFA and the rest of the Department to seek solutions to health care problems in rural communities by working with other Federal agencies, the states, national associations, foundations and the private sector. They are part of key regulation teams that are implementing the many provisions of the Balanced Budget Act of 1997 and their research centers provide valuable policy relevant rural research. In short, they are rural health advocates inside the beltway. The office also funds several grant programs that can help rural hospitals and other providers.

• HRSA also funds Rural Outreach and Network Development programs that help rural communities find innovative ways to stretch and coordinate their scarce health care dollars. There are also a number of other programs that are important supplements to rural hospitals. These programs, such as the Community Health Centers and the National Health Service Corps, help bring services and health care personnel to underserved rural areas. In addition, there also are now more than 3500 Rural Health Clinics that currently receive cost-based reimbursement from Medicare. Many of these clinics are affiliated with rural hospitals.

• HRSA also has been involved in the development of telehealth services for rural areas. This technology has been a real boon for rural hospitals. Through our rural telemedicine network grant program, we have funded the development of telehealth networks that have linked more than 100 rural hospitals with tertiary care centers to bring a wide range of specialized clinical care services to their communities while also increasing the range of education and professional interaction for their providers through distance learning. Last year, we created the Office for the Advancement of Telehealth to continue and expand these efforts.

• The Children=s Health Insurance Program is another source of help in addressing health care needs for rural communities. This initiative, enacted in the BBA, is helping the states provide coverage to many of the 10 million children in families that work, but are still too poor to afford health insurance. It=s our hope that by getting more children covered by health insurance, we can help reduce the amount of charity care that rural hospitals are now providing. That helps improve the bottom line for these hospitals while also getting kids the health care services they need.

• Beyond our agency, the Department also has a number of targeted reimbursement programs under Medicare and Medicaid to help rural hospitals. In fact, Medicare already provides special payment support to more than half of all rural hospitals through such designations as the Medicare dependent hospital or sole community hospital designations.

In closing, I think it=s important that we continue to monitor the status of rural hospitals as we work our way through the BBA and the other many changes taking place in the health care system. I believe the Department, through its policies and its grant programs, can work to mitigate many of the problems faced by rural hospitals and ensure their long-term viability. I want to thank you, Senator Cochran and Senator Kohl, for the opportunity to be here today, and I will be pleased to answer your questions you may have.