Rural hospitals pressured to close as healthcare system changes

SAN FRANCISCO Sep 3 (Reuters) - In January, Linden Texas native Richard Bowden suffered a mild stroke. Within minutes, medics had taken the 68-year-old to the local hospital emergency room, less than a block from his house.

A patient undergoing an eye examination at a clinic in Wise, Virginia July 20, 2012. REUTERS/Mark Makela

“They checked me out real good,” said the former city councilor, whose East Texas community of nearly 2,000 has relied on the Linden hospital since the 1960s.

Shortly after returning home, Bowden learned he would outlast the hospital itself: the facility was about to close because there weren’t enough patients. “It blindsided me,” he said. “It’s 15 miles to the next hospital. Out in the country, that seems like a long way.”

Small, rural hospitals like Linden have always struggled to remain viable, but things are getting worse, fast. Rural communities are shrinking at a time when healthcare providers are being pressured to cut costs and release patients sooner.

Twenty-four rural hospitals have closed across the country since the start of 2013, double the pace of the previous 20 months, according to the North Carolina Rural Health Research Program. For graphic see:

“Even with community support, investment in quality personnel and equipment, patient activity was not at a sustainable level,” Steve Altmiller, president and chief executive of Linden hospital’s owner, Good Shepherd Health System, said in a statement announcing the closure. “The decision to close the Linden facility, while difficult, is one that is occurring across the country.”

Now the Affordable Care Act, better known as Obamacare, is bringing additional pressure. Obamacare is designed to fold the poor and uninsured into the healthcare system, but changes in how the federal government pays for the disadvantaged are already pressuring the hospitals that cater to them, such as rural ones.

Reformers are eager to see some hospitals close, including many out in the country. They argue that good care in the form of clinics and modern ambulances can tend to residents much better than decades ago, undercutting the need for local emergency rooms.

Investors are being warned of the change. Standard & Poor’s Ratings Service in August concluded that the nonprofit hospital sector is “at a tipping point” from the drop in the number of patients cared for. Moody’s Investors Service reported hospital revenue growth and operating margins are at all-time lows. Fitch Ratings wrote that the Affordable Care Act has accelerated the transition of patients out of the hospital and into clinics by tightening reimbursements and emphasizing technology.

“There is a big transition happening,” said Mark Claster, president of investment firm Carl Marks & Co and chairman of North Shore-Long Island Jewish Health System board of trustees. “I don’t think smaller hospitals are prepared, and I don’t think they can be. I don’t think they have the economic wherewithal.”


Good Shepherd acquired Linden from the city nine years ago and spent $6 million on renovations, including revamping the emergency room. “It was very modern,” said Linden Mayor Clarence Burns.

The hospital’s net revenues grew from almost $8 million in 2006, the year after the acquisition, to $13.3 million in 2010, according to Texas Department of State Health Services data.

But operating losses were constant and accelerated, along with bad debt, which grew to nearly $3 million in 2012 from $990,000 in 2006. By 2013, the little hospital had a cumulative $11 million in losses under Good Shepherd, according to the nonprofit’s financial statements.

Good Shepherd declined to discuss finances with Reuters. Public statements by the company, financial records in bond disclosures, and the state of Texas data describe changes over the years.

Two trends hurt the hospital: the number of patients shrank, as did hospital reimbursements from Medicare and Medicaid, two primary payment sources for rural facilities. Further issues lay ahead, including changes in federal funding for indigent patients and rural hospitals.

In the six years leading up to 2012, Linden’s admissions dropped to just over four patients a day on average, from about 10 patients in 2007, according to state data. Fewer than one person per hour came to the emergency room in 2014.

Linden had 1,988 residents in the 2010 census, down nearly 12 percent in a decade.

Good Shepherd blamed losses on a paucity of patients and federal cuts to reimbursement in Medicaid and Medicare. For example, Medicare payments were cut 2 percent as part of the sequestration federal budget battle in 2013.

Larger health systems with a variety of services and fewer Medicare patients can try to shift offerings, raising revenue by providing specialty surgeries, such as a hip replacement, or oncology services. But smaller hospitals with fewer resources have less flexibility.

Implementation of the Affordable Care Act may exacerbate the problem for small facilities.

“Revenues are coming down and expenses are not coming down as quickly,” said George Huang, municipal securities research director at Wells Fargo Securities. “The smaller guys have fewer resources available to them.”

The federal government historically has supported rural hospitals. Since 1997 it designated many as “critical access” facilities, recognizing that their small size meant they could only focus on essential medical services. Such hospitals got extra federal funds.

Last year, the U.S. Department of Health and Human Services’ Office of Inspector General recommended the government tighten rules on critical access hospitals to save money. That would likely to cut the number of such facilities by two-thirds.

Funding for the poorest also is changing, as the Affordable Care Act cuts payments for indigent care, in the expectation that many impoverished and uninsured will move to Medicaid. But 23 states have not expanded Medicaid, fearing it could eventually leave them with financial burdens. So in those states, a gap in federal support for the poor has emerged.

Hospitals in states that don’t expand Medicaid will see their profit margins drop by a few percentage-points by 2021, reported research firm The Advisory Board Company. “For many, that could be the difference between being profitable, and being in the red,” the firm wrote on its website in July.

The majority of rural residents in the United States live in states which are not expanding Medicaid, reported the North Carolina Rural Health Research Program. A majority of the 24 hospitals closed since the start of 2013 are in those states.

“In states that are not expanding Medicaid, we’re seeing hospitals close. The finances are just not working out,” said Tim Jost, Washington and Lee University School of Law professor.


Making healthcare more affordable and efficient is a good thing, say analysts. As the dominant provider in the marketplace, hospitals have “become incredibly inefficient,” because there was less incentive to keep costs down, said Jason Hockenberry, health policy and management professor at Emory’s Rollins School of Public Health.

One in five hospitals, over 1,000 at least, will close by 2020, forecasted Ezekiel Emanuel, a White House health policy special advisor who helped shape the Affordable Care Act.

“Long live fewer hospitals. Welcome to the new age of digital medicine,” Emanuel wrote in his book, Reinventing American Health Care. Clinics can more efficiently take on many duties performed by hospitals, leaving hospitals to focus on the severely ill, he said.

Emanuel predicts the first hospitals to go will be smaller ones, which already operate with less than half of their beds filled. When Linden closed, less than 20 percent of its beds were occupied on any given night.

For Linden resident Bowden, the next trip to the hospital would certainly be longer, although it would be in an emergency vehicle that is a different technological breed from when the little hospital was built.

For decades he’s heard ambulances “ripping up to the hospital.” Now that it is closed, he says, it has been real quiet.

(The story corrects typographical error in paragraph 5 to country instead of county, corrects paragraph 10 to chairman instead of vice chairman)

Reporting By Robin Respaut; editing by Peter Henderson