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Analyzing the First Wave of REH Conversions




Vulnerable rural providers have been converting to the new Rural Emergency Hospital status at a rate of 1.5 per month throughout 2023, the first full year of the program. That might not qualify as a groundswell, but 18 volunteers for a new and untested reimbursement model is still notable.

 

This is a model we’ve been closely following since it was first introduced, so the one-year anniversary seemed like a good time to assess. As a quick review, Medicare offers two major financial incentives to rural hospitals that opt for REH status: Outpatient services are reimbursed at 105% of the OPPS, and hospitals receive guaranteed monthly “facility payments” totaling $3.2 million a year. In exchange for these incentives, REHs agree to shut down inpatient services as well as skilled nursing beds that are not operated as a separate unit. The goal is to offer sustainable emergency and outpatient services in rural communities that would otherwise lose healthcare services altogether.

 

Greg Flicek, a CPA and senior manager at our partner firm Ascendient, analyzed financial data for 17 of the 18 first-year REH conversions. (One hospital, Alliance Healthcare System in Holly Springs, MS, had no publicly reported data in the American Hospital Directory.) Among the key findings:

 

  • Negative operating margins. Prior to conversion, 15 out of 17 REHs had operating margins of -20% or worse. These are unsustainable numbers, implying that those hospitals would face significant challenges in maintaining their service offerings going forward.

  • Minimal inpatient revenue. For the two hospitals that did have positive operating margins, inpatient net revenue was almost nonexistent – $115,000 or less. Overall, 13 out of 17 hospitals had annual inpatient net revenue of less than $3.2 million. When inpatient services are negligible to begin with, there is little risk in curtailing those services in favor of a secure, $3.2 million stipend.

  • Minimal swing bed utilization. In our analysis, 14 out of 17 hospitals had a swing bed ADC of less than 1.0, and none had annual swing bed utilization of more than 500 days. REHs cannot operate swing beds, but giving up those beds is an easier decision when utilization is very low.

  • No or low revenue from the 340B drug program. Roughly two-thirds of hospitals opting for REH status did not participate in the 340B program prior to conversion. For the six remaining hospitals, we assume that their 340B revenue was limited – likely acute patients rather than retail pharmacy. REHs are not eligible to participate in 340B, so again, the decision is easier when pharmacy sales are low or nonexistent.

  • Low systemization. Only six REH conversion hospitals were part of a health system; the remaining 11 were independent. That is consistent with a longstanding trend of greater vulnerability among independent hospitals – though some systems apparently see a financial opportunity in converting their struggling rural facilities while growing inpatient care at flagship locations.

 

All of these findings align closely with our REH Conversion Calculator, which uses more than a dozen datapoints to estimate how well the REH model might fit the needs of any given hospital. Operating margins and inpatient revenue are weighted most heavily by our calculator, while swing beds, 340B participation, and system status all play a significant though less prominent role.

 

We continue to believe this free data tool is the best first step for any hospital considering REH status, especially with additional monitoring for two other factors that emerged in our analysis:

 

  • Medicaid expansion. As of Dec. 1, only 20% of US states have failed to expand Medicaid eligibility – but those same states account for roughly 66% of REH conversions. This suggests that small rural hospitals are faring somewhat better with Medicaid expansion, while those in non-expansion states are more in need of a financial lifeline.

  • SCH vulnerability. Critical Access Hospitals in the U.S. outnumber Sole Community Hospitals by a 3-to-1 margin, yet more SCHs than CAHs have converted to Rural Emergency Hospital status thus far (7 vs. 5). This suggests that the older SCH model may be relatively less helpful or relevant in the current healthcare environment, increasing the attractiveness of the REH option.

 

If you’d like to know how your hospital rates as a prospect for REH conversion, please click here for your free, customized report.

 

 

The Future of REH Participation

 

First-year adoption was relatively slow, but we see three potential drivers for continued growth of the REH model.

 

First, the financial success of early adopters will be a key factor. Only 85 hospitals opted for CAH status in the first full year of that program (1999), but early studies showed promise right from the start. Looking at 80 of those early CAH adopters, the University of Minnesota found average profit margins swung from -4.1% to +1.0% in the first year. Not surprisingly, conversions grew steadily, and there are about 1350 Critical Access Hospitals today.

 

Secondly, we’re watching for regulatory changes. Congress loosened the rules for CAH participation several times in the early years, helping to increase participation. In one revision, hospitals closed since 1989 were allowed to reopen as CAHs; in another, reimbursement for allowable costs increased from 100% to 101%. Similar changes to REH guidelines could spur greater interest in the program.


Finally, Medicare Advantage growth could push more CAHs to convert to REH. Cost-based reimbursement is one of the biggest attractions of CAH status – but only for patients with traditional Medicare, who are now in the minority nationwide. Medicare Advantage plans negotiate reimbursement rates like commercial payers, so the rapid growth in MA enrollment undermines the financial logic of CAH status. As rural hospitals continue to see erosion in cost-based reimbursement, the $3.2 million annual facility payment for Rural Emergency Hospitals could look more and more attractive.

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