Some states to focus on rural hospital solvency

Some of the states that recently received a share of $50 billion in federal rural health funding explicitly aim to use some of it to bolster the finances of struggling rural hospitals.

The funding comes through the Rural Health Transformation Program (RHTP), which intended to help rural healthcare providers succeed amid the projected cutbacks in federal Medicaid funding over the next decade under the One Big Beautiful Bill Act (OBBBA).

RHTP recently awarded $50 billion to the states over five years through 2030. Each annual disbursement includes $5 billion to be doled out equally to all 50 states, and up to $5 billion in discretionary funding was based on states’ specific proposals. However, those annual allocations, announced Dec. 29, varied based on CMS’s view of each state’s application and ranged from annual payments of $147 million (New Jersey) to $281 million (Texas).

The state grants can fund a wide range of rural healthcare-focused initiatives, so not all state plans opted to specifically focus on their rural hospitals.

The state efforts come as the Center for Healthcare Quality & Payment Reform warned in December that among 2,256 rural hospitals, 14% face immediate closure risk, 34% face some risk of closure and 44% have dropped some service lines.

“I’m hopeful that the RHTP will give us runway and time to stabilize and begin the transformation, to reimagine what the healthcare system should be, and use this opportunity with the RHTP funds, again, first to stabilize so that we can preserve infrastructure by which to transform,” Janice Walters, executive director of the Rural Health Redesign Center, said in an interview.

States emphasizing hospitals

Ohio’s application specifically called out the rural hospital crisis by noting in its application that 13 counties are “maternity care deserts” after the closure of hospital delivery units and that nearly one in five rural hospitals in the state are at risk of closure.

Its application’s hospital-focused initiatives plan to use its base funding and $202 million in annual supplemental funding to create “innovation hubs,” workforce initiatives and technology support.

New Hampshire plans to use some of the base funding and the $204 million in annual discretionary funding to implement its Rural Financial Solvency Initiative. That effort aims to “advance value-based payment models, streamline financial operations, and sustain safety-net providers,” according to the state’s plan.

That includes designing, evaluating, and implementing a rural hospital payment model that “rewards investments in primary care, lowers avoidable ED and inpatient utilization and keeps more care local.”

Washington state said one of its key goals was to “improve financial solvency for rural hospitals and providers” by using the federal funds to “ignite innovation in rural hospitals.”

“Consistent with national trends, many of Washington’s rural providers are under financial strain. Between 13 and 17 of Washington’s 39 CAHs [critical access hospitals] are currently experiencing distress based on Flex Monitoring Team profitability indicators,” said the state’s application.

The state aims to use the funds to drive 50% of rural hospitals to engage in an advanced payment model co-design process and 25% of rural hospitals to participate in the value-based advanced payment model within the program’s five years and “ensure no additional rural hospitals close their obstetric units.”

Alternative payment

About 15 states plan some form of alternative payment model for their rural providers as part of their RHTP applications, said Walters. And that approach is critical to their financial support.

“Any plan that doesn’t have alternative payment in it as part of its sustainability is concerning to me,” she said. “Unless we fundamentally figure out how to change the way health is paid for in a way that’s affordable, none of this is going to be sustainable. At the end of the day, it has to tie back to the healthcare dollar and what we’re paying for in healthcare.”

And the design of such models will be key because rural hospitals traditionally have struggled under value-based payment, in part because their patient panels were much smaller which greatly increased financial risk due to cost variation.

Lessons learned from the Pennsylvania Rural Health Model, which Walters oversaw for the state of Pennsylvania, included the need for rural hospitals to obtain stable funding across payers while they innovated.

The Pennsylvania model “was basically testing if global budgets improve the stability of the hospital and [found], yes, the fixed payment produced benefits,” she said.

However, that model also found the global budget approach didn’t improve margins for rural hospitals because it disincentivized cutting high-cost elective services, for example, and making those organizations more efficient. Also, hospitals would not eliminate low-volume elective surgeries because doing so would have counted against the hospital’s global budget.

The willingness of rural hospitals to transform into core service providers, instead of trying to reproduce the broad range of services offered by wealthy suburban hospitals, is key to their ability to thrive under value-based payment, Walters said.

“There has to be some type of a budget, slash fixed payment, on which to ensure these institutions, I’m going to say, survive, so that we can transform them into what the community needs for the future,” Walters said.

Rightsizing

The Pennsylvania application specifically aimed to rightsize rural hospitals.

Walters said that approach aims for the type of outcome that the state’s earlier rural payment model was attempting.

“Identify what they can do and do really, really well, and through alternative payment, hopefully pay them to do that,” she said. “And when we talk about rightsizing rural hospitals, I have one hospital CEO that will say to me, ‘Just tell me what you want me to be, and I will do it really, really well,’ because they’re exhausted from trying to keep their facilities open.”

A shift to value-based payment is critical in allowing such rightsizing because it moves hospitals off fee for service, which requires endlessly chasing volume increase, and they are unable to drop services that could be provided more efficiently on a regional basis, Walters said.

 “When we talk about rightsizing rural hospitals, the only way to do that is we have to pay them differently,” Walter said.