Health Care
Looking for a Lifeline
Low Medicare reimbursements are bleeding the financial health of Virginia's rural community hospitals. Can they survive?

By Page Boinest Melton
For years, Patrick Community Hospital has served as a welcome shelter for the sick in Southside Virginia. Thousands of patients, many poor or elderly, traveled for miles to the small community hospital in Stuart because there were few alternatives in their isolated area. "It’s all the people have," says Pat White, who provides home health care to the area’s elderly patients. "We’re in a remote place and it’s important to have a hospital nearby, instead of Martinsville or Roanoke. Patients want to stay in the community."

Many of Patrick Community's patients, such as Lena Pinkerton, are ill and elderly and depend on having a hospital close by. Photo by Mark Rhodes

Yet today, Patrick Community has become an icon for troubled rural hospitals. It has fallen victim to poor management decisions and basic accounting problems. Last summer, the hospital fired its two top officers and found itself drowning in nearly $6 million in debt. In November, the hospital took the only avenue available and filed for Chapter 11 bankruptcy, buying precious time to reorganize its finances.

Even more distressing for Patrick Community — and a dire warning for other Virginia hospitals — are the unforeseen changes in how the federal government pays for Medicare and Medicaid patients. Payments have been sharply cut, leaving hospitals like Patrick Community holding the bag for many expenses. That especially smarts at Patrick Community because low income and elderly Medicare patients represent 75 percent of the hospital’s income. "It was the straw that broke the camel’s back," says Roanoke bankruptcy lawyer A. Carter "Chip" Magee Jr., who represents the hospital. By January, the hospital that had provided cradle-to-grave care for more than a generation of Virginians was looking to the county government for a bailout to pay a looming bank note.

Medicare alone can’t be blamed for Patrick Community’s demise. It clearly suffers from other significant problems. But an increasing number of Virginia hospitals already buffeted by rising costs and the move toward managed care are finding it harder to meet their budgets because of shrinking federal Medicare reimbursements that will sink by $1.8 billion over the next five years. "It’s easy to stub your toe. A lot of these hospitals have been limping along. ... It’s become a difficult industry in the last five years," says Magee.

Perhaps the most pressing task for all of Virginia’s hospitals is gauging the depth of Medicare reductions. Shifting federal estimates make the impact a moving target. In January, the Congressional Budget Office revised its five-year estimates and said the cuts would be $62 billion deeper than initially anticipated, doubling the impact originally intended by Congress. Last year, responding to pressure from the health care industry, Congress restored about $15 billion to the Medicare program. It’s a start, but nowhere near enough to staunch the flow of what some say amounts to outright hemorrhaging at the nation’s hospitals.

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The American Hospital Association predicts that by 2004, nearly 60 percent of all hospitals will not be able to cover expenses for treating Medicare patients. The Virginia Hospital and Healthcare Association figures the $1.8 billion reduction in Medicare payments will prove to be a hefty tab, even for hospitals that collectively reported $8.5 billion in net operating revenues last year.

While all hospitals feel the Medicare reductions, rural and community hospitals — many operating close to or below profit margins — end up being hardest hit. "They’ve got fewer places to go to recoup the lost money," says Jeff Goldsmith, who writes and lectures on the health care industry. "They have a smaller private-pay base and they’re not going to be able to increase rates." Rural hospitals tend to have high rates of uninsured patients and a disproportionate number of elderly patients.

Responding to the Medicare mess, community and rural hospitals are retooling services, borrowing from lenders, hitching to larger hospitals or looking for help from a federal rural health-care program. Virginia hospital executives believe they have to be nimble to survive the next few years. "You have to continue to focus on expenses when your large payer is going to reduce payments to you," says Craig James, Tazewell Community Hospital president and CEO.

James has been scrambling to recover from Medicare cuts. His 56-bed hospital retains a positive profit margin: a slim 1.7 percent in the last fiscal year. But that margin dropped 50 percent from the previous fiscal year, largely because of smaller Medicare payments that account for 60 percent of revenues. To bolster revenues the hospital added a few new services, such as osteoporosis and work-rehabilitation treatments, plus a physician specialty clinic for visiting doctors from Bluefield Regional Medical Center. The hospital maintains a partnership with Bluefield and has had a management affiliation with Carilion Health System since 1980.

On the other side of the state, in Franklin, Southampton Memorial Hospital started looking at the hospital’s long-range health in 1997, the same year Congress was cutting the Medicare program. A consultant’s five-year forecast predicted trouble for Medicare collections, which are 51 percent of the hospital’s business. That forecast factored into Southampton’s decision to sell its assets to the 47-hospital Community Health Systems chain in Tennessee. On March 1, Southampton traded in its not-for-profit status to become part of a for-profit system, a difficult but timely move, now that Southampton’s Medicare reimbursements have dropped about 15 percent, says COO David Havrilla. The hospital now has access to more capital and accounting help than before.

The hospital had little choice but to sell, Havrilla says, given the economic climate. "We understand we’re not just a business. We need to be here for the community." When last year’s flood closed more than 180 businesses in Franklin’s downtown, the hospital not only treated patients, but served as a hub for information and community assistance. Telephones and temporary cash machines appeared in the hospital’s parking lot.

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One solution for hospitals struggling to absorb lower Medicare payments may be the federal Rural Hospital Flexibility Program, adopted by Congress to relieve pressure on smaller rural hospitals. The initiative will allow rural hospitals to streamline and focus on only emergency care, primary care and preventive care — instead of every possible hospital service — while qualifying for greater Medicare reimbursements. The General Assembly adopted legislation this session sponsored by state Sen. Roscoe Reynolds, a Democrat whose district includes Patrick Community Hospital. It requires the state to draft a plan that would bring Virginia into the program.

The federal program is heavy on rules. Participating hospitals must be geographically isolated, with no more than 15 acute-care beds and no more than 25 total beds. Average hospital stays will be limited to 96 hours, and the hospitals must form partnerships with other, usually larger facilities. The major hurdle for some may be the limit on beds; the biggest incentive will be returning to cost-based reimbursement not used since the 1980s.

The ultimate question will be how many Virginia hospitals will qualify, or want to qualify, for the new designation. Margot Fritts, who works with rural hospitals at the state health department, says the state has already talked with a handful of hospitals about the change and predicts that "as time goes on, the changing financial picture may precipitate a lot more interest." David Cockley, a James Madison University professor and president of the Virginia Rural Health Association, estimates that 14 Virginia hospitals potentially could qualify, given the bed limits and geographic restrictions.

One of the first Virginia hospitals in line for the new critical access designation will be Patrick Community Hospital — a designation Magee says is likely to be a crucial part of a three-prong strategy to carry the hospital out of bankruptcy. For the first step, the hospital won legislative approval to create a hospital authority with greater freedom to raise the $2 million it needs right away. Once financing is resolved, Patrick Community Hospital will look to affiliate with a larger, healthier hospital or hospital system. Obtaining the critical access designation over the next two years will be a final key piece of the recovery strategy, Magee says.

The critical access program won’t make sense for everyone, says Cockley. "It’s a tool, one more arrow in the quiver." Stressed rural hospitals that choose not to seek critical access designation still have other choices, though some not so popular: reducing services, selling to a larger hospital system or simply closing their doors.

"We will have to focus on what we do best, with a heavy emphasis on primary and preventive services," says James, Tazewell Hospital’s CEO. It’s a simple matter of economics, with high stakes: By operating on smaller profit margins, hospitals such as his will have limited access to capital and fewer options to diversify into new services. But with a $4 million payroll, the hospital is a significant area employer, so failure is not an option, James says. "What differentiates us is the small patient population size," he says. "It relates to our ability to actually know the patients and their families a little better. I think we have to build on that."

With the reductions, it may be true that the federal Medicare program is no longer teetering on the brink of insolvency. But the cuts could force some rural hospitals to shut their doors. That may be unpalatable but necessary, says industry analyst Goldsmith of Charlottesville, who is working with a startup company to buy and operate rural hospitals in partnership with larger hospital systems. "For every institution that needs to close, there are three or four others that need to be more tightly linked to regional centers to fit within [what] society is willing to pay," he says. "At the end of the day we will have fewer of these places, but hopefully they will be stronger and better managed."

Magee has a more blunt prediction: "It may well be like the airline industry deregulation, with big hubs handling the bulk of service and outlying Band-Aid stations that will patch people up and ship them to the big centers. The environment is forcing those small stand-alone hospitals to look for a lifeline." One result could be poorer health access for people living in isolated areas. For beleaguered Patrick Community Hospital, latching on another hospital’s lifeline may be the only way to survive Medicare’s Brave New World.