Medicare cuts squeeze rural hospitals

Sequestration’s Medicare payment cuts will have a disproportionate impact on small, rural hospitals, new reports show, and the cuts will soon get deeper.

A 1% reduction to all Medicare payments via sequestration kicked in April 1, after Congress suspended the program during the COVID-19 pandemic. The cuts will scale up to 2% on July 1; an additional 4% Medicare reimbursement reduction is slated for 2023 via the Pay-As-You-Go Act.

Sequestration, combined with waning reimbursement levels from private insurers, declining COVID-19 relief grants, lower patient volumes and higher operating costs, jeopardize more than 600 rural hospitals, or more than 30% of the U.S.’ approximately 1,800 rural hospitals, according to a report from the Center for Healthcare Quality and Payment Reform. Two hundred of those hospitals are at risk of closing over the next two to three years, according to the report.

The sequester, PAYGO and Affordable Care Act market-basket cuts amount to an estimated $316,000 revenue hit in 2023 for Guadalupe County Hospital in Santa Rosa, N.M. That’s about 5% of its $6.3 million in 2021 net patient revenue, said Christina Campos, the administrator of Guadalupe County Hospital.

“It is just a constant squeeze. There seems to be fewer opportunities to pivot,” she said. “Without the additional dollars from the COVID-19 relief funding, we would definitely be in the red like most rural hospitals.”

The Medicare sequester is expected to reduce rural hospital revenues by nearly $230 million in 2022, according to the Chartis Center for Rural Health’s estimates.

If implemented this year, PAYGO would have dented rural hospital revenues by more than $900 million, Chartis data show. The program would reduce Medicare spending by $36 billion a year, illustrating the latest push and pull between the federal government trying to keep the program solvent and hospitals pushing for adequate reimbursement rates.

“The boogeyman is the PAYGO cuts. They would be catastrophic,” said Michael Topchik, national leader at Chartis. “If we go back to where we were before the pandemic, half of rural hospitals were operating in the red and a record number were closing. Compound that with an additional 4% cut and it would be untenable.”

Larger health systems have more of a buffer. As Medicare reimbursement declines, they can shift their resources to other payers and service lines.

Dallas-based hospital chain Tenet Healthcare, for instance, estimated that the reinstated Medicare sequester cuts would slash the hospital chain’s revenue by $46 million in 2022, a Moody’s Investors Services report issued Thursday noted. But that is less than 2% of Tenet’s $3.3 billion in earnings before interest, taxes, depreciation and amortization in 2021.

“Obviously, this year the sequestration obviously does have an impact on year-over-year basis, but we would continue to focus on growing the higher-acuity, higher-margin services,” Daniel Cancelmi, chief financial officer at Tenet, said during the fourth quarter earnings call in February. “That’s been an area of focus, and it’s going to continue to be an area where we allocate capital and we think that’s really beneficial.”

Hospitals like Guadalupe County Hospital disproportionately rely on Medicare beneficiaries, given their relatively older population. But private insurers tend to mimic Medicare reimbursement, which has further taxed the hospital, Campos said.

Commercial insurers’ reimbursement rates didn’t keep pace with a median 3% increase in rural hospitals’ patient service costs in 2020 amid the labor shortage, according to the Center for Healthcare Quality and Payment Reform report. Meanwhile, total charges for services delivered decreased by a median of 2% in 2020, the report found. Volumes still haven’t rebounded, rural hospital operators said.

While the sequester cuts and sunsetting COVID-19 aid will have a negative financial impact, they will not lead to a significant number of rural hospital closures, according to Ge Bai, an accounting and health policy professor at Johns Hopkins University who studies rural hospitals.

“Hospitals, like all other organizations, have discretionary spending and can adjust it when facing revenue challenges,” she said. “Relying on prolonged federal aid rather than improving operational efficiency, will exacerbate structural problems—such as low occupancy rates—and elevate financial risks for these hospitals.”

Tenet’s self-reported numbers and the objectivity of the Center for Healthcare Quality and Payment Reform report are questionable, Ge said.

Policy experts hope that new payment models, like the Rural Emergency Hospital model that eliminates inpatient services in exchange for higher Medicare payments, will stabilize rural hospitals. But the Rural Emergency Hospital pay boost won’t be enough, said Harold Miller, CEO of the Center for Healthcare Quality and Payment Reform.

“Creating global hospital budgets, eliminating federal sequestration, eliminating inpatient services and expanding Medicaid will not solve the serious problems facing rural hospitals,” he said in a news release. “The only way to ensure that residents of small rural communities have access to affordable, high-quality healthcare is for their health insurance plans to pay adequately for the services delivered by their local hospitals.”