2023 forecast: Amid dwindling COVID relief funds, rural hospitals face a 'fiscal cliff'

In the first year of the pandemic, 19 rural hospitals closed their doors. Yet in the years since, only six have. What these historic lows might suggest is deceptive, experts caution. 

In the decade leading up to 2020, the average margins of rural hospitals were on a downward trajectory, with more than 130 closing in that time. During the COVID-19 pandemic, existing challenges with limited staff and capacity got worse. But thanks to pandemic relief funds, rural hospitals received billions of dollars to offset mounting costs. 

“It seems almost certain that that flow of COVID funds provided a lifeline for rural hospitals,” George Pink, deputy director of the North Carolina Rural Health Research Program, told Fierce Healthcare. 

“We knew that was just creating a fiscal cliff once that funding was going to run out,” echoed Texas Hospital Association CEO John Hawkins.  

With dwindling funds, rural hospitals are expected to return to pre-pandemic levels of profitability.

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“These are long-term secular trends that won’t go away anytime soon,” Pink said, adding that he wouldn’t rule out a substantial increase in closures. Nearly a third are at risk, according to one analysis, which would implicate nearby hospitals as inpatient admissions and ED visits spillover.

Here’s what experts predict is next for rural hospitals.

Double down on recruiting and retaining staff

The first priority for all hospitals is staffing, according to Jesse Neil, a healthcare attorney at Waller, a law firm based in Tennessee. A shortage of staff and poor margins is “terminal,” he told Fierce Healthcare. 

Labor expenses have exploded for both rural and urban hospitals since the pandemic began. But rural hospitals have the added challenge of convincing clinicians to live and work in their area. To successfully recruit staff, rural hospitals may be paying up to 50% more than other facilities, Neil said: “So it’s damned if you do, damned if you don’t.”

“Once you have them it’s really, really important to do what you can to keep them happy,” said Michelle Franklin, CEO of Sullivan County Community Hospital in Indiana. The organization conducts regular employee engagement surveys and leadership training with staff, which have positively impacted net revenue, patient satisfaction and employee engagement, Franklin said. That has minimized turnover even through COVID.

The hospital is currently working on securing contracts with physicians to join its staff as far out as 2029. “That is never going to get off my plate,” Franklin said.

“Most of the time, people aren’t going to come asking you—you’ve got to ask them,” Beth Oller, M.D., noted. A family physician in rural Kansas, Oller said three physician partners leaving the local hospital “left us with big holes.” Providers should be leading the effort to recruit—and leadership must have the foresight to prioritize that investment.

Prepare for a payer mix that may shift

Rural providers tend to rely more on public payers. While critical access hospitals depend mostly on Medicare for cost-based reimbursement, federal sequestration rules reduce payments to less than 100% of eligible costs. Medicaid has notoriously low rates, according to Carrie Cochran-McClain, chief policy officer at the National Rural Health Association. And commercial rates depend on a hospital’s bargaining power. “Their ability to negotiate rates with private payers is somewhat limited,” Cochran-McClain told Fierce Healthcare. 

If Medicare patients shrink, commercial payers are unlikely to fill that gap, Cochran-McClain noted. “There’s only so much of that wiggle room that you can build into your base rates,” she said.

If a recession hits and more people go on Medicaid or fall into the coverage gap, that could be a stressor on critical access hospitals, according to Kelly Arduino, healthcare leader at accounting firm Wipfli, which works with rural hospitals. Shifts in the payer mix could “dilute” the percentage of patients on Medicare, which rural hospitals depend on.

Medicare Advantage (MA) plans, which are allowed to exclude hospitals from their networks, pay less than traditional Medicare, often negotiating even lower rates for rural hospitals. While a few years ago it was less popular to see MA penetration in rural areas, the trend has since grown, per Hawkins of the Texas Hospital Association. That could threaten reimbursement: “All those little things add up.”

Uncertainty around rural emergency hospital (REH) status 

Struggling critical access hospitals have the new option of transitioning to a rural emergency hospital. But doing so would mean losing their inpatient beds, Cochran-McClain said. That could worry the community, especially amid the tripledemic. For others, it could be a meaningful way to keep some access to care in the community. 

Nevertheless, many fear the new model will be looked to as the solution for rural healthcare. “It feels like we are putting bandaids on something that needs a significant overhaul,” Cochran-McClain said.

Nearly 70 hospitals were predicted to convert to REH as of mid-2021. But most are waiting to learn more, according to Brock Slabach, COO of the National Rural Health Association. States are also not all prepared to set up the licensure needed to run the facilities. In Texas, that process could take 18 months, Slabach said.

REH may become more popular over time, thinks Emily Cook, an attorney counseling providers at McDermott Will & Emery. First, some legislative changes are needed to make the option more viable—like what happened following the reveal of the initial critical access hospital model. 

“I think it’s going to be a very active next Congress for provisions related to rural hospitals,” Cook said.

Rationalizing for revenue 

Even if rural hospitals don’t immediately close, some service lines likely will shut down. Depending on the populations a hospital might serve, the first to go are usually pediatrics, obstetrics and a move to more outpatient services, according to Hawkins.

Hospital leaders must constantly evaluate their priorities. “Necessity is the mother of invention,” Neil of Waller said. “The biggest danger to these hospitals is the status quo.” 

When choosing what to keep, rural hospitals should discuss their plans with tertiary hospitals in the region to figure out what would be the best value-add to the community, suggests KPMG national sector leader of healthcare and life sciences Ash Shehata. 

They should also try to negotiate better rates with commercial payers. Shehata recommends starting with Blue Cross plans, which have a more robust network in each state and will be looking to preserve access for members. 

It’s also helpful to be aware of movement in a community. For instance, if a new manufacturing plant comes to an area, “there’s a lot of opportunity for new, good-paying jobs that are going to need access to healthcare,” Shehata said. Connecting with local employers who will advocate for the sustainability of a local hospital is another potential source of support.

A period of heightened collaborations

Neil expects rural hospitals to enter into a cycle of restructuring—and also collaborations. While there is concern about getting taken advantage of by a larger partner, rural hospitals should find someone they trust, Neil recommends.

These types of relationships can grant hospitals access to payer contracts, IT infrastructure, specialty clinicians and group purchasing for drugs and medical supplies, per KPMG’s Shehata. Rural hospitals might even team up with retail health clinics to deliver lower tiers of care. 

“At the end of the day, the important thing is that you keep care local between whichever facilities you’re working hand-in-hand with,” Franklin said.

There will also be opportunities for private equity acquisitions, Shehata predicts, potentially in the second half of the year. But a rural hospital will need to be financially stable to be a good candidate. And having affiliation agreements with specialty providers in the area will make those investments more likely. 

Private equity may also be more interested in a rural hospital based in a Medicaid expansion state, where under-resourced hospitals have fared better over the years. “The reimbursement and the political environment for the hospital is a big indicator of whether or not it will be a good fit for a private equity investment,” Shehata said. 

Though some advocate for private equity funding in healthcare, many investigations demonstrate the perils of such an approach. Earlier this summer, Kaiser Health News revealed that two rural hospitals closed after being acquired by a private equity-backed startup that had taken in millions in COVID funding. 

Ultimately, with great challenges comes real opportunity, experts say.

Hospital leaders have the chance to transform a community for generations to come. “It’s almost like a public post,” Neil said. “Now’s the time to really show what you can do.”