On December 27, 2020, the Centers for Medicare & Medicaid (“CMS”) of the Department of Health and Human Services created a new provider type for embattled rural1 and critical access hospitals (“CAHs”)2—the Rural Emergency Hospital (“REH”).3 Designation as an REH allows for a suspension of a hospital’s inpatient operations while maintaining emergency department and outpatient services, thus allowing many rural hospitals to discontinue inpatient operations that are no longer financially sustainable. Hospitals choosing to convert to an REH model are reimbursed differently than existing rural hospitals or CAHs, receiving a monthly facility payment and payment for “REH services” in an amount of 105% of the Outpatient Prospective Payment System (OPPS).4 Additional flexibility under the Stark Law has also been given to encourage physician investment in the REH model. However, the removal of inpatient services from rural communities is not without its critics, and the REH provider type is no panacea for all of the challenges currently faced by struggling rural hospitals.
Struggle of Rural Hospitals
The struggle of rural hospitals has been well documented in recent years, with 194 rural hospitals either no longer providing inpatient services or shutting their doors since January of 2005.5 Common reasons cited for closure include health insurance plans failing to sufficiently reimburse rural hospitals for the cost of delivering services to patients, inflation, workforce shortages, and low financial reserves.6 These issues were exacerbated by the COVID-19 pandemic, which caused declining financial margins and patient volumes resulting in 19 closures alone in 2020.7
Of those challenges faced by rural hospitals, low patient volume in rural areas can cause difficulties both in maintaining fixed operating costs and participating in performance measurement and quality improvement programs.8 In 2019, approximately two-fifths of rural hospitals had negative operating margins, and median operating margins among rural hospitals were 1.5%, compared to 5.2% among other hospitals.9 And according to one report from the Center for Healthcare Quality and Payment Reform, in at least half of U.S. states 25% or more of the state’s rural hospitals are at risk of closing.10 That number rises to 40% in at least 12 states.11
Further, rural hospitals usually serve a disproportionate share of uninsured and Medicaid patients, with fewer private pay patients (often reimbursed at higher rates) than their urban counterparts.12 Costs of providing healthcare at rural hospitals are also greater than those in urban areas due to the “smaller number of patients served relative to the fixed costs of the services.”13 A common example is the provision of emergency services in a rural community—such services must be provided on a 24/7 basis, keeping costs comparable between many similarly-sized rural and urban hospitals. However, the number of admissions to the emergency departments of rural hospitals tend to be significantly fewer, resulting in a higher average cost per visit for rural hospitals.14 This trend is reflected in acute care generally, with the acute occupancy rate for rural hospitals (37%) being less than two-thirds of that for urban hospitals (62%).15
With rising costs outpacing current reimbursement models, rural hospitals must look to new approaches to remain sustainable.
A New Model: Rural Emergency Hospitals
In order to qualify as an REH, hospitals must have less than 50 beds and been designated as a rural hospital or CAH prior to December 27, 2021.16 The hospitals must further meet certain Conditions of Participation (“CoPs”) promulgated by CMS in order to enroll, including that they have: 1) a transfer agreement with a Level I or Level II trauma center; 2) an appropriately staffed emergency department 24 hours a day, 7 days a week; and 3) a physician, nurse practitioner, clinical nurse specialist, or physician assistant available to provide rural emergency hospital services 24 hours a day.17 A qualifying hospital converting to an REH model must also discontinue its inpatient services.18
Each REH provides “rural emergency hospital services,” which include emergency department services and observational care which “do not exceed an annual per-patient average of 24 hours” in the REH.19 Basic laboratory services,20 radiology services,21 and pharmaceutical services22 are also required, as well as 24-hour nursing services.23 A rural hospital may also provide outpatient services24 at their election, which may include—but is not limited to—radiology, laboratory, outpatient rehabilitation, surgical, maternal health, and behavioral health services.25 To the extent the outpatient services are specialty services, the REH must have a physician or advanced practitioner with training in the specialty service area in accordance with their scope of practice.26
Remaining CoPs require that each REH have either an effective governing body or responsible individuals that are legally responsible for the conduct of the REH, including the services provided and appointment of appropriate medical staff.27 Policies and procedures must be developed for the delivery of health care services, including post-acute care needs of patients. Each REH must have facility-wide programs for emergency preparedness and infection prevention and control in conjunction with an “effective, ongoing . . . data-driven quality assessment and performance improvement (QAPI) program.”28
Hospitals qualified pursuant to the above requirements and CoPs can enroll in Medicare and begin receiving payment as an REH.
Higher Outpatient Reimbursement, Monthly Facility Payments, and Physician Investment
Rural hospitals and CAHs choosing to designate as an REH will move away from their existing prospective payment or cost-based system29 to a new reimbursement model for many of the “rural emergency hospital services” described above. For such outpatient services, Medicare will pay for 105% of the OPPS amount it would otherwise pay for such services, with copayment amounts based on the 100% OPPS rate.30 Such payments are subject to existing OPPS payment policies and are limited to those services defined as “covered OPD services” for existing hospital outpatient department services.31
Each REH will additionally receive “facility payments” in 12 monthly installments.32 These payments are calculated pursuant to statute, with initial payments in 2023 starting at $272,866 per month, and an increase in accordance with the “hospital market basket percentage increase” for each subsequent year.33 REHs must further “maintain detailed information as specified by the Secretary as to how the [REH] has used the [facility payments],” which must be made available upon request.34
For any services furnished by an REH that do not meet the definition of “rural emergency hospital services,” REHs will be paid based upon the applicable Medicare fee-for-service system.35 Such services include professional services rendered by a physician or nurse practitioner, physical therapy services, certain laboratory services paid under the Clinical Laboratory Fee Schedule.36 Notably, this means certain services an REH is required to provide will not be considered “rural emergency hospital services” as they are not reimbursable by the OPPS as “covered OPD services.” Such excluded services also include “medical health diagnostic and therapeutic items and services commonly furnished in a physician’s office,” such as radiology, laboratory, outpatient rehabilitation, surgical, maternal health, and behavioral health services, which an REH may provide at its option.37
In addition to these payment changes, hospitals which classify as an REH may be owned by community physicians which operate as a source of referrals for the REH—a practice currently prohibited under the Stark Law38 since passage of the Affordable Care Act (“ACA”).39 While Stark Law remains applicable to REHs,40 CMS chose not to define REHs as “hospitals” for purposes of Stark. This allows REHs to meet Stark’s “rural ownership” exception41 without falling under the ACA’s prohibition on new physician investments in “hospitals.”
Concern Remains Over Impact of Conversion on Rural Communities
Despite financial incentives and ownership flexibilities, the REH model may not be feasible for some rural hospitals for both practical and financial reasons. Many rural communities do not view the closure of inpatient services as a viable option, and because most at-risk hospitals are in isolated rural communities, closure of a hospital means residents of these communities will need to travel long distances for inpatient care—possibly to another state.42 Lack of inpatient services may further affect a rural community’s ability to recruit and maintain a healthy workforce.43 For those rural hospitals owned by a local municipality, closure of inpatient services can also defeat the very purpose for which such hospitals were created.
Critics have argued that facilities may lose money by eliminating inpatient care because “[i]n reality, about half of the services at the average rural hospital are delivered to patients with private insurance (both employer-sponsored insurance and Medicare Advantage plans).”44 Thus, the argument goes that amounts paid by private plans—not Medicare and Medicaid—determine whether a rural hospital will have to close, making the conversion to REH an unnecessary elimination of community health care services.45 Such insurers are not obligated to follow Medicare’s lead in reimbursement of REHs.
Finally, conversion could impact a hospital’s ability to take part in existing payment savings programs, such as the Health Resources and Services Administration’s 340B drug program. The 340B drug program requires pharmaceutical manufacturers participating in Medicaid to sell outpatient drugs at discounted prices to providers that care for uninsured and low-income patients, allowing enrolled hospitals to achieve average savings of 25-50% in pharmaceutical purchases.46 Conversion to an REH will eliminate the ability of some eligible hospitals to participate in such a program.47
An Imperfect Solution
While the REH model may provide greater reimbursement to a segment of struggling rural hospitals and CAHs, the closure of their inpatient services will undoubtedly have a profound impact on their communities. However, the ability of the REH provider type to allow for such hospitals to shutter what is often the most beleaguered facet of their business may help these hospitals remain financially solvent to provide services and jobs in their rural community. While not a perfect solution, the REH model can provide financial relief to many rural hospitals on the verge of calling it quits.