Critical condition

New Hampshire’s rural hospitals struggle to keep pace with changing market

Payments from commercial insurers “are the difference between breaking even and losing money,” says Mike Peterson, president of Androscoggin Valley Hospital in Berlin. Photo by Allegra Boverman

Since 2010, nearly 100 rural hospitals across the country have closed. And in February, Navigant Consulting Inc. of Chicago reported that 473 of the 2,045 remaining — including five unidentified hospitals in New Hampshire — are at high risk of closure. At the same time, more than 1,400 hospitals have merged or affiliated in the past decade.

“It’s as hard to be a hospital administrator as it is to be a doctor these days,” said Roland Lamy, president of Helms & Company of Concord, a regional healthcare consultancy. “It’s getting harder and harder to make this all work.”

Many rural hospitals serve economically stressed communities with shrinking or slow-growing and fast-aging populations. Their patient volumes are relatively low, marked by a high proportion of the elderly, sick and poor either enrolled in Medicare or Medicaid or without health insurance altogether, all of which weighs on their profitability. The federal Government Accountability Office found that financial issues are “the root cause of most closures.”

Most but not all rural hospitals are certified by the Centers for Medicaid and Medicare Services (CMS) as critical access hospitals (CAH), a designation introduced in 1997 to lessen financial risks to rural hospitals and ensure essential services to rural communities. There are 13 CAHs in New Hampshire, all nonprofit healthcare charitable trusts.

To qualify as a CAH, a hospital must operate more than 35 miles from another hospital — 15 miles in mountainous terrain served by secondary roads — provide around-the- clock emergency services, have no more than 25 beds and keep patients for an average of no more than four days. CAHs must also maintain agreements with tertiary hospitals for referring patients requiring treatments and procedures they do not provide.

CAHs receive preferential cost-based reimbursement at 101% of allowable costs for all Medicare services as well as qualified investments in capital improvements. They are granted flexibility in structuring their staffing and services as permitted by state licensing requirements. The Medicare Rural Hospital Flexibility Program — or Flex Program — provides technical assistance and financial support to CAHs to improve quality of care along with operational and financial performance.

‘Razor-thin margins’

Aggregate data compiled for Medicare in 2016 and updated in 2018 shows that by most indicators the financial performance and condition of the 13 CAHs in New Hampshire mirror national medians. However, their operating margin, total margin and return on equity, all primary indicators of profitability, were 0.18%, -0.29% and 0.47%, respectively, well below the national medians of 2.74%, 0.93% and 5.32%.

“We’re always on the margin,” said Jeremy Roberge, CEO of Huggins Hospital in Wolfeboro, which he added has “hovered around breakeven for 10 years. Our margins are enough to sustain us,” he continued, “to keep us in business, but always close to being out of business.”

Repeating an adage in the industry, Scott Colby, president of Upper Connecticut Valley Hospital in Colebrook — the smallest in the state — said, “no margin, no mission.”

“Things are moving very fast in healthcare,” said Steve Ahnen, president of the New Hampshire Hospital Association. “With razor-thin margins, it is very difficult to keep pace with the changes.” He pointed to the rising cost of technology, pharmaceuticals and personnel as driving hospital expenses.

Ahnen said that the low margins reflected low Medicare and Medicaid reimbursement rates. New Hampshire’s Medicare reimbursement rates, on which Medicaid rates are based, are the lowest among the 50 states, at 49% of the national median. “The payment schedule is based on average costs,” he said. “If you’re less than that, OK, but if not, it’s red ink.”

Moreover, the Affordable Care Act trimmed Medicare funding by 0.8% and a congressional sequester trimmed another 2%.

Referring to “the silent killer,” Lamy said that managed care organizations redefine “allowable costs” and change clinical policies to shift costs to hospitals and patients. Ahnen suggested that reimbursements to CAHs average around 85 cents on the dollar.

Meanwhile, employers seeking to lower costs increasingly offer limited coverage plans, especially high-deductible health plans — so-called “skinny” plans — in which nearly half of non-elderly adults are now enrolled. Evidence suggests enrollment in HDHPs is relatively greater in rural areas. Although less expensive, these plans often leave patients with large unexpected costs beyond their means, which are carried by hospitals as uncompensated care.

Patient revenue is primarily a function of volume and “payer mix,” or the proportion of services billed to government insurance — Medicare and Medicaid — commercial insurers and self-paying patients. A study by the Congressional Budget Office found that, on average, commercial insurance payments to hospitals are 89% higher than Medicare and Medicaid reimbursements.

At the 13 CAHs, Medicare and Medicaid represent between half and two-thirds of all billings, while commercial insurers account for about 30% or less. The balance consists of uninsured and self-paying patients, who are liable to become bad debts. As the population ages, increasing Medicare enrollment will further tilt the balance.

Mike Peterson, president of Androscoggin Valley Hospital in Berlin — where Medicare accounts for 50% and Medicaid 14% of all billings — said that payments from commercial insurers “are the difference between breaking even and losing money.”

Aggressive financial management

While chafing at being taxed to fund the expansion of Medicaid, hospitals supported the program, which has bolstered operating margins by reducing the number of uninsured and the amount of uncompensated care. More than three-quarters of recent hospital closures have occurred in states that declined to expand Medicaid.

Mike Lee, president of Weeks Medical Center in Lancaster, said that after operating in the red for several consecutive years, the hospital is in its third year of sound financial performance, a result he attributed to aggressive financial management, musing “but without Medicaid expansion?”

Likewise, Peterson said that expanded Medicaid contributed to halving bad debt at AVH. At the same time, hospital executives said that disproportionate dependence on Medicare and Medicaid, which are always liable to changes in administration and reimbursements, regularly expose CAHs to significant risk.

“We pay our taxes,” Peterson said, “then wait and hope.”

Maria Ryan, CEO of Cottage Hospital in Woodsville, said that commercial insurers add to the challenges by reducing payments as well as disputing and denying claims. “They offer no benefits to rural hospitals,” she said. “We don’t have a partnership with the insurance companies.”

Meanwhile, the CAHs have sought to protect their revenue streams from the likes of urgent care centers or walk-in clinics.

This year, the state Department of Health and Human Services requested legislation — Senate Bill 97, sponsored by Sen. Jeb Bradley, R-Wolfeboro — requiring anyone seeking to open an urgent care center within 15 miles of a CAH to demonstrate it would have no adverse impact on the hospital.

The bill was opposed by state and local government as well as insurance companies, all of which claimed that the clinics would provide low-cost alternatives to hospital care.

According to Administrative Services Commissioner Charlie Arlinghaus, who oversees the insurance program for state employees, “we need to increase the number of high-quality, low-cost providers and lower out-of-pocket costs for our employees. This bill is moving in the opposite direction.”

To Bradley, “the lower cost of healthcare cannot come at the expense of our healthcare network.”

Ahnen reminded the Senate Executive Departments and Administration Committee of the challenges facing the CAHs while Peterson pointed out that urgent care centers keep business hours, but “our emergency departments never close” and while the profits of centers go to the shareholders, all returns to the hospital are reinvested in the community. Ultimately, the bill was amended to form a study committee and carried the Senate by a voice vote.

Workforce needs

The impact of demographic trends and financial pressures on CAHs is exemplified by the fate of maternity units.

Since 2000, nine hospitals have closed their units (New London Hospital, Franklin Regional Hospital, Alice Peck Day Hospital in Lebanon, Valley Regional Hospital in Claremont, Cottage Hospital, Huggins Hospital, UCVH, Weeks and LRGHealthcare). At Huggins, which closed its unit in 2009, CEO Roberge explained that three obstetricians are required to staff the unit, and the declining number of births was insufficient to defray the cost and enable the staff to maintain its competency. A decade later, he said, “It’s still a big deal.”

Lamy suggested that maternity units were an example of hospitals having to make difficult choices between services that generate revenue — like surgery, orthopedics, oncology and radiology — and those that communities value, like maternity service, and need, mental health care and substance abuse treatment, which are provided below cost.

While patient volume and payer mix pose persistent challenges, hospital administrators point to the recruitment and retention of staff as their most pressing immediate priority, especially at the northernmost hospitals.

“Getting qualified help — nursing staff, imaging technicians, rehab aides — is very difficult and very costly,” Colby said. Noting that the workforce is aging, Lee said recruiting new nurses is difficult and time-consuming.

Peterson said while “we’re not struggling with a severe shortage, recruitment is difficult and when we get someone, we make sure we keep them.”

All three said that in the North Country recruitment is hindered by the relative lack of employment opportunities for spouses. Likewise, as Peterson said, they are competing with hospitals across the country for talent. In recruiting, they seek to appeal to those comfortable living in a rural setting and seeking a lifestyle featuring year-round outdoor recreation. Asked how to attract doctors and nurses to the North County, Lamy remarked, “look for those who like to hunt and fish.”

At least nine of the 13 CAHs have addressed these challenges by affiliating with larger healthcare systems. Alice Peck Day Hospital and New London Hospital became members of Dartmouth-Hitchcock Health System, while Monadnock Community Hospital and Huggins Hospital joined Catholic Medical Center in GraniteOne Health. In January, the two networks announced their intention to merge. Memorial Hospital in North Conway is one of 11 hospitals in the Maine Health network. In 2002, Franklin Regional Hospital merged with Lakes Region General Hospital in Laconia to form LRGHealthcare.

In 2015, the four hospitals north of the Notches — Littleton Regional Healthcare, AVH, Weeks and UCVH — formed North Country Healthcare. However, in January, Littleton Regional, easily the largest and strongest of the four, announced the hospital would withdraw from the consortium.

Robert Nutter, president of Littleton Regional, said that the leadership of all four partners has changed since the consortium was formed, and his board, after reassessing the arrangement, decided the hospital could best pursue its mission and strategy independently.

Highlighting the strength of the hospital’s clinical team, he said, “we’ll be rotating staff with neighboring hospitals, including those in Newport and St. Johnsbury, Vt. We intend to be a regional player.”

Economic impact

Peterson of Androscoggin Valley called Littleton’s decision “a setback,” but said the remaining partners “are still committed to the mission.” Lee said that a consortium still offers an opportunity to share overhead, combine purchasing and negotiate pricing.

This would leave Cottage, Speare Memorial Hospital in Plymouth, Valley Regional and likely Littleton Regional Healthcare the remaining independents.

Despite what she described as “a really tough year,” Ryan said, flatly, she intends for Cottage to remain independent.

“We are very innovative and very entrepreneurial,” she said, “and have become very efficient at lowering and controlling costs.” She said that geriatric behavioral health and comprehensive rehabilitative services are tailored to the needs of an aging population. While pursuing relationships with other hospitals, especially Dartmouth-Hitchcock, she stressed that independence “enables us to stay nimble and do business with everybody.”

Likewise, Michele McEwen, president and CEO at Speare, said she would have to be convinced that affiliation “would improve the health of our community.”

Deanna Howard, interim CEO of Valley Regional, who followed the pilot project in Montana that led to the creation of CAHs in 1997, also served as president of UCVH. She noted that as one of five neighboring hospitals in Grafton, Cheshire and Sullivan counties — all within reasonable driving distance — Valley Regional is positioned “to build regional programs and leverage resources.”

Howard said that as the costs of personnel, technology, pharmaceuticals and supplies continue to rise, smaller hospitals are hard-pressed to spread them over dwindling volumes of patients.

“We’re looking for ways to build regional programs to leverage resources,” she explained, adding, “we don’t all need full-time ‘-ologist doctors.’” Besides, there are degrees of affiliation, she said, describing it as “easy to say, but hard to do. Valley is having this same conversation.”

CAHs are major sources of economic activity and social capital in their communities, which include some of the most hard-pressed in the state.

Seven of the 13 are the largest employers in their municipalities and another four are the largest private employers in their communities. Apart from sheer numbers, hospital staff — clinical, technical, administrative and support — represent a disproportionate share of professional employment in these communities, which is reflected in monthly payrolls ranging between $1.1 million and $3.5 million.

As healthcare charitable trusts, the CAHs are required to assess the needs of their communities annually and prepare a plan for meeting them as well as to file a report quantifying the benefits they provide each year. Benefits include charity care, unreimbursed costs (including Medicare and Medicaid), contributions in cash or kind, professional education and public service. In fiscal year 2017, the CAHs reported benefits worth $70 million.

Ahnen, of the Hospital Association, said that the crisis in the state’s mental health care system has led to a growing recognition in state government that without sufficient and sustained investment, particularly in the form of satisfactory reimbursement rates, the infrastructure of care erodes, reducing access to the right care, at the right place, at the right time. “Are we willing to make and sustain the required investments?” he asked.

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