Insights: Article

Getting Through the Rural Closure Crisis

By Rick Wagner

November 02, 2017

More than 70 rural hospitals have closed since 2010. The current environment is challenging for these vital but vulnerable hospitals. And, although they haven’t closed, many other rural hospitals face financial difficulties and countless pressures from a myriad of changes in recent years. It’s estimated that there are more than 200 hospitals in significant financial stress that are threatened with closure.

 Pressures affecting a rural hospital include:

  1. Difficulties recruiting and retaining medical staff
  2. Loss of market share to urban competitors doing outreach
  3. Decreasing inpatient census of acute and swing bed patients
  4. Decreasing case mix index due to loss of surgical specialties
  5. Increasing volume of outpatient care, but at lower rates from commercial payors
  6. Increasing emergency room coverage costs and call costs for other specialties
  7. Outdated facilities that just weren’t designed for the current delivery of health care
  8. Lack of clarity by Boards and community of your purpose/mission

If any or all of these sound familiar, you’re not alone. Retail competitors have entered the health care market, like Walmart, Walgreens, CVS, Teledoc, ambulatory surgical centers, etc., bringing new pressures to the entire health care system. The system is changing from volume to value as Medicare and other major payors are working on modifying the fundamentals of how you’ll be paid for caring for patients in the future. 

Four categories of facilities
Successful rural hospitals are handling change by reinventing themselves and adapting to the wants and needs of their community. For some, that may mean no inpatient facility at all. But not all hospitals are responding so successfully. We see versions of the following four scenarios playing out across the country:

  1. Successful facilities
    Rural facilities with a strong population base and diverse physician groups servicing much of the community’s needs could be considered successful. These facilities, if run efficiently, will continue to grow and survive this evolution mainly because they see the changes and started adapting many years ago. The patient base and community support positively influence these facilities, but they also stay focused on providing an efficient care delivery model and continually look for ways to reduce waste in their operations.

    These organizations are typically the leaders in their markets, adopting new and innovative ways to provide real and practical solutions for their patients. They’ve clearly determined that they can’t be everything to everyone and have focused their efforts on what they do best.

  2. Opportunity facilities
    Small, rural hospitals with downward pressure on revenues and volumes but good financials – either from their own cash reserves or subsidies — might be called opportunity facilities. They have time to plan and adapt to their changing environment based on their financial position. They have the resources necessary to face the issues, pursue positive changes and stay focused on adapting to pressure.

    The opportunity for these facilities is to take advantage of their financial well-being and start investing in retooling their practices. It’s important for these facilities to recognize that the future is changing, and they should approach it head-on by making the necessary adjustments. And as a result, they’ll continue to be strong and healthy for the communities they serve.

  3. Threatened facilities
    The right location but lack of support and inability to build cash reserves and keep up with the capital demands of the industry define threatened facilities. Their cash position may jeopardize their existence even though the community is theoretically large enough to sustain a full-service hospital. They face many, if not all of the pressures affecting rural hospitals, and have less flexibility, strategically, to adapt to change.

    Often, these facilities have possibly been too conservative in the past with changing practices and attempts to receive local subsidies and donations. Recruitment of the best talent is getting harder and harder, so organizations need to position themselves for future candidates so they survive and foster in the future. The best talent want to associate themselves with winners.

  4. Adaptable facilities
    Adaptable facilities are located in areas with small populations and transitioning care that may never produce enough volume to survive as a full-service hospital. These facilities typically have little to no cash on hand and may require substantial funding from the local community or state to remain viable. For most of these facilities, their future might not be as a traditional inpatient hospital. Instead, these communities could look at other alternatives to meet the needs of the residents they serve.

What should you do?
If you identify with the first category — successful facilities — more than likely you’ve already started facing changes and addressing issues in recent years that have allowed you to get where you are today. But it’s important to continue to be aware of trends, understanding changing payor models and demographics, and avoiding complacency.

Here’s how other rural hospitals can survive:

Opportunity facilities
The urgency of needing a plan in place to survive and thrive is apparent. The basic question to start with is: What is really needed to support the health needs of your community — given its demographic and economic future — and how can your organization positively impact the broader health of the community and save lives that might not otherwise be saved? If you start with the attitude of “How do we save the hospital as it exists today,” you may be doomed to fail. It’s important to be open to the possibility of a new strategy that looks different than your current operating plan.

It’s a smart time for you to review your operations and the community you serve to make necessary changes to adapt. There are many success stories of positive changes to operational efficiency and strategy of care delivery. Spend time in strategic planning understanding your options. Once you have a plan, be ready to adapt to meet that plan and continually look at your operations from both a revenue generation and cost-efficiency standpoint. Be ready for workforce reductions or a shift in staffing plans.

Threatened facilities and adaptable facilities
If your hospital falls in one of the last two categories, swift action is required to survive. Work to quickly understand your needs, community demographics and realistic options. Don’t be afraid to make quick, but informed choices changing strategy or pursuing remedies. Reach out to partners to assist you in your analyses, like business advisors or other potential affiliates. Many communities have moved to affiliate with, sell or transfer sponsorship of their organization to larger integrated health systems to help support health care in the community.

When properly executed, affiliation in various forms can be successful, but it needs to be fully vetted before the deal is done. Many communities could have benefitted from clearly articulating their goals and needs before entering deals. Often, there is a disconnected from what the local board thought they would be getting from the deal versus what the system intended to provide.

The current market pressures have presented some scenarios that require facilities to consider drastic actions, such as reorganization and bankruptcy. These actions can provide the organization with the necessary time and resources to develop a reorganization plan. Facilities in these situations need to seek out experienced legal counsel familiar with hospitals and reorganization proceedings.

We have found one of the critical success factors to using these options as an effective path to reorganization is to have a plan in place outlining how your organization will emerge from the process before the instigation of any proceedings.

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