by Shelley Michelson

As a class, the nation’s 1,322 critical access hospitals (“CAHs”) are themselves on the critical list, as are all rural hospitals. Since last year, 22 rural hospitals have closed, according to the National Rural Health Association. Of this total, 20 were in states that had blocked the Obamacare Medicaid expansion.[1] Georgia has been especially hard hit, with 4 rural hospitals having closed since 2012 and a possibility of an additional 15 rural hospital closures. Nevertheless, despite massive changes in the healthcare environment affecting their viability, it may be possible to find value in this sector by looking hard at individual credit characteristics of critical access hospitals.

Shock waves from the recent economic recession, sequestration (resulting in a 2% Medicare reimbursement cutback), shifts from inpatient to outpatient care and from volume to value-based care, physician and administrative manpower shortages, required meaningful use of electronic medical records and the imposition of quality metrics and accountable care have placed the most pressure on these hospitals and hospitals that serve disproportionately high numbers of uninsured, under-insured and Medicare and Medicaid populations.

Loss of these facilities can often mean life or death to the area’s residents.

With Medicare and Medicaid revenues constituting 60-80% of patient revenues, the average rural hospital operates at a loss of 8.3%, according to the National Rural Health Association. Now, the proposed federal FY 2015 federal budget specifically targets CAHs with further cutbacks affecting their special reimbursement status, their staffing and their access to discount pharmaceuticals. Changes are also proposed to other portions of the CAH criteria, threatening the existence of many needed facilities. These hospitals are essential to serve the health care needs of over 61 million people annually and are often the economic engines of their communities. Loss of these facilities can often mean life or death to the area’s residents.

The Critical Access Hospital designation, created via legislation enacted as a component of the Balanced Budget Act of 1997, authorized states to establish “State Flex Programs” that allowed certain rural hospitals with Medicare contracts to enter into special Medicare reimbursement arrangements exempting them from the inpatient and outpatient Prospective Payment System. Instead, CAHs were to be reimbursed for most inpatient and outpatient services at 101% of reasonable costs, subject to Part A and B deductible and coinsurance amounts. Sequestration has cut this reimbursement back to 99%.

In order to qualify as a CAH, each hospital must conform to the following criteria:

  • Be located in a state with a state rural health plan in a designated rural area that is located more than 35 miles away from any other hospital or 15 miles, if located in an area of mountainous terrain or only secondary roads; states could waive the distance requirement if the mileage cutoff was missed narrowly
  • Be in compliance with its Medicare contract and be certified as a CAH prior to January 1, 2006 via the state’s designation of “necessary provider” status
  • Provide 24/7 emergency services via on-site or on-call staff available within specific response time
  • Have a complement of no more than 25 beds (may also operate distinct part rehabilitation or psychiatric units of up to 10 beds each)
  • Maintain an average length of stay (“ALOS”) of not more than 96 hours per acute care patient (excluding rehabilitation or psychiatric services) with physician certification that this ALOS is not expected to be exceeded

The Office of Inspector General (“OIG”) of the Department of Health and Human Services  has recommended a re-evaluation of certain qualifications, including the distance requirements, citing the fact that 75% of CAHs are in violation of the federal distance requirement. If CAH status for these hospitals had been revoked in 2011, the federal government calculated a savings of almost $450 million. The OIG estimates a savings of $860,000 annually per decertified CAH bed nationwide. In Texas, 60 of its 80 CAHs would lose their status and their favorable Medicare reimbursement, which could cost these hospitals over $1 million per year.

Critical Access Hospitals are facing greater short-term and long-term risks as are the communities they serve and the investors who finance their facilities.

In the March 2013 issue of Focus Insights, Focus Management Group, a healthcare consulting firm, asks the question, “Are Critical Access Hospitals at a Higher Risk?” In mentioning that about 10% of CAHs filed for bankruptcy protection in 2011 and 2012, the affirmative answer to this question cites higher fixed staffing costs over a lower revenue base, higher supply and service costs due to lack of purchasing leverage, physician manpower shortages and lack of sophisticated leadership. The firm recommends “intense financial management,” including stress testing.

Critical Access Hospitals are facing greater short-term and long-term risks as are the communities they serve and the investors who finance their facilities. Existing state Medicaid expenditures and whether the state has agreed to participate in the Obamacare Medicaid expansion, therefore, will be an important factor sustaining CAHs, as expanded access to the federally-subsidized Medicaid expansion is expected to bolster profitability at these facilities by curtailing bad debts and charity care. Bloomberg reported late in 2013 that yields on comparably rated hospital bonds sold at the same time were higher in non-Medicaid expansion states than in those states that had implemented the Medicaid expansion.

As the percentage of Federal subsidies of the Medicaid expansion declines from 100%  beginning in 2014 to 90% by 2020, it appears that taxpayers will be left to absorb increasing percentages of the non-covered Medicaid medical costs. Indeed, if changes occur in the party composition of Congress, it is uncertain whether the rate of federal subsidies will be maintained at any level.

Given existing laws and proposed legislative changes, as well as potential judicial decisions affecting the healthcare industry and specifically, critical access hospitals, the stronger facilities in this category will be those that are located in Medicaid expansion states with larger underserved populations  and have strong affiliations with bigger, financially strong facilities or systems that can help foster regional Accountable Care Organizations and provide merger partners, if necessary. These affiliations can also provide access to healthcare manpower, group purchasing and payer contract assistance as well as other tools for cash flow augmentation: revenue cycle management, expense control, quality improvement and IT investments. A strong management team and Board of Directors with knowledge of healthcare law and a focus on meeting and exceeding the financial covenants in their financing documents are also essential.  Finally, the value to the community of the facility, as reflected in voter-approved sales or other taxes and local and state political support, are paramount in the continuing financial viability of critical access hospitals.

[1] AK, AL, FL, GA, ID, KS, LA, ME, MS, MT, NC ,NE, OK, SC, SD, TX, WI, WY;  not implemented. IN, MO, PA, TN, VA, UT  undecided. Source: Wells Fargo Securities Municipal Commentary 7/1/2014

About the Author

Shelley Michelson, Principal of Healthcare Analytics, LLC, is an experienced municipal credit analyst specializing in hospital finance. She has extensive knowledge of the healthcare industry, particularly factors that influence hospital credit quality.


Disclaimer: The opinions and statements expressed in this column are solely those of the author and Healthcare Analystics, LLC, who are solely responsible for the accuracy and completeness of this column. This column does not reflect the position or views of RICIC, LLC or MuniNetGuide.

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