Selected SLC Research


Policy Analysis | May 5, 2015

Rural Hospital Funding in Non-Expansion States

Lauren Greer

Improving Funding for Rural Hospitals Between January 2010 and December 2014, 47 rural and critical access hospitals have closed around the country, 31 of which are in SLC states. As of January 2015, 24 of those hospitals remain closed, 10 have been converted to outpatient and primary care rural health clinics, nine have been converted to urgent or emergency care centers, and four have been converted to rehabilitation or nursing facilities. 1 Under the federal Affordable Care Act (ACA), Medicaid Disproportionate Share Hospital (DSH) payments were set to begin phasing out in FY2014. Under the plan, the phasing out of DSH payments, which are intended to provide additional funding to hospitals that serve a large number of Medicaid and uninsured low-income patients, was set to be complete in FY2020. The design of the ACA was for the reduction in DSH payments to be off-set with a reduction in uninsured patients through Medicaid expansion and subsidies for private insurance. Although the implementation of DSH reductions has been delayed until FY2017, additional reductions, including a 2 percent sequestration reduction on Medicare payments, have quickly contributed to the demise of already financially fragile rural hospitals. With this trend expected to accelerate in the future, particularly in non-Medicaid expansion states, some states have begun to discuss alternatives for funding rural hospitals. The most prevalent strategies being discussed for addressing the declining health of rural and critical access hospitals is creating partnerships or mergers with larger hospitals, developing innovative delivery models that rely on integrated healthcare, and expanded utilization of telemedicine in rural areas.

The following information provides details on approaches taken by several SLC states to address the declining fiscal health of rural hospitals, as well as other options that may be worth considering when crafting a solution to address these issues.

Georgia: Rural Hospital Stabilization "Hub and Spoke" Pilot Project In 2014, Governor Nathan Deal announced the formation of the Rural Hospital Stabilization Committee, bringing together policymakers and other stakeholders, to identify the needs of the rural hospital community and provide potential solution for addressing those needs.

Following the recommendations of the Committee, the state will implement a "hub and spoke" pilot program at four regional hospitals to leverage the technology and resources available at the "hubs" to relieve some of the cost pressures associated with the over-utilization of emergency departments in rural hospitals. Through an integrated hub and spoke model, providers can use existing and new technology to ensure patients receive treatment in the most appropriate setting as well as monitor and administer follow-up care to chronically ill patients. Under the plan, the spokes would include smaller critical access hospitals, Wi-Fi and telemedicine-equipped ambulances, telemedicine-equipped school clinics, federally qualified health centers, public health departments, and local physicians. The Committee has requested an appropriation of $3 million for grants.

The final report of the Rural Hospital Stabilization Committee can be found here.

South Carolina: Hospital Transformation Plan In 2014, the South Carolina General Assembly approved a proviso2 establishing a statewide initiative called the Hospital Transformation Plan to help hospitals transition from a business model that focuses on inpatient admissions and filling bed-space to a more sustainable financial model. The plan will provide $15 million in one-time state funds, plus any available federal funds, to assist in this transition. Although the proviso did not direct how the money should be used to accomplish this goal, it did include the creation of long-term partnerships between rural and non-rural hospitals to ensure "seamless, timely, and high-quality clinical care for patients in rural areas of the state" as one means of building a more sustainable model of service delivery. Non-rural hospitals ("advising hospitals") will be eligible for up to $4 million for entering into long-term financial relationships with a critical access or rural hospital ("target hospital community"). The contractual relationship must meet the needs of the target community while reducing reliance on inpatient admissions, surgery, or high-tech diagnostics to achieve economic viability and sustainability within the target hospital community.

Additional details on implementation of the plan, as proposed by the South Carolina Department of Health and Human Services, can be found in the public notice of amendment to DSH allocations under the State (Medicaid) Plan.

Mississippi: Rural Hospital Transition and Improvement Grant Program (Proposed) The Mississippi House of Representatives has proposed the creation of the Mississippi Rural Hospital Transition and Improvement Grant Program to incentivize the implementation of plans and methodologies that increase access to healthcare in the community and rural hospital sustainability. Under the plan, rural hospitals in the state would be eligible for up to $500,000 of the $10 million grant funding available each fiscal year. Approved uses for the grants include:

  • Modifying the type and extent of services provided so as to reflect the needs of the rural hospital and community;
  • Developing hospital-based physician practices that integrate hospital and existing medical practice facilities under an agreement to transfer their practices, equipment, staffing, and administration to the hospital;
  • Establishing a provider cooperative, telemedicine system, electronic healthy records system, or rural healthcare system;
  • Covering expenses associated with being designated a critical access hospital under the Medicare Rural Hospital Flexibility program; and
  • Increasing accessibility to health services in the community and/or addressing hospital efficiency and viability.
Language for the House amendment to Senate Bill 2123 can be found here. The amendment, which initially was introduced in House Bill 114, was removed from the final version of SB 2123 in Conference Committee.

Mississippi: Telemedicine Through the 2014 legislative session, 22 states and the District of Columbia have enacted a telemedicine parity law; however, the breadth of coverage under these laws varies by state. Telemedicine provides a means for patients in rural areas to receive specialized treatment, and in some cases primary care, from within their community. Previously, these services may only have been available to those in more urban areas or to those willing to travel, sometimes considerable distances.

In 2013, Mississippi enacted one of the most comprehensive telemedicine parity laws in the nation with the passage of Senate Bill 2209, which requires private health insurance plans, state employee health insurance plans, and public assistance insurance plans, including Medicaid, to provide coverage of telemedicine services to the same extent as if the services were provided in person. The state's support for telehealth has allowed its only academic hospital to establish remote connections in 165 sites across Mississippi, providing adult, pediatric, and ancillary services in more than 30 different medical specialties.3

In September 2014, the American Telemedicine Association released a report detailing the strength of each state's parity law, Medicaid service coverage and conditions of payment, and innovative payment or service delivery models. Mississippi was one of only seven states to receive a grade of A under their analysis; the SLC states of Tennessee and North Carolina also received a grade of A. The full report, "State Telemedicine Gaps Analysis: Coverage & Reimbursement,' including details on the methodology of the analysis and a profile of each state's coverage, can be found here.

Outcomes of Rural Hospital Mergers: Rural Hospital Mergers and Acquisitions: Who is Being Acquired and What Happens Afterward? (August 2014)

The North Carolina Rural Health Research Program examined the pre-merger characteristics and post-merger outcomes on financial performance and staffing levels of the 121 rural hospitals that were part of mergers between 2005 and 2012 in the United States. Measuring the success of mergers against the anticipated benefits of improved financial performance, service consolidation, and operating efficiencies, the study found that, in general, two-thirds of the mergers fell short of expectations. Researchers found that hospitals with weaker financial performance and lower staffing costs were more likely to merge, while those with a higher total profit margin and higher proportions of outpatient revenue from Medicare versus other payers were less likely to merge. Following the merger, the analysis found that, on average, the hospital's operating margin decreased by 1.4 percent, although the statistical significance of this finding was deemed to be weak. Stronger evidence found that following the merger the average total salary expense fell by $664,488, or $1,223 per full-time equivalent (FTE) employee, with no evidence to show a reduction in the number of FTEs. Researchers also found no statistically significant increase in capital expenditures. Based on the findings of its analysis, the study surmised that while there is little evidence to support the expectation that mergers will contribute to significant improvements in financial performance, it might still be a viable option for rural hospitals seeking to avoid closure.

Additional information from the report can be found here.

State Medicare Rural Hospital Flexibility Program The State Medicare Rural Hospital Flexibility Program (Flex) aims to improve access to preventative and emergency healthcare services for rural populations. The Flex Program provides federal grant funding to the states to support the conversion and designation of small rural hospitals to Critical Access Hospital (CAH) status; support operational and financial improvements in CAHs; assist in the development and maintenance of quality healthcare systems, including integration of Emergency Medical Services (EMS) in rural areas; and spur quality and performance improvement activities to improve care.

The 2014 State Flex Program Profiles, compiled by the National Rural Health Resource Center, provides information on the Flex Program in each state highlighting their activities in three core areas (quality improvements; operational and financial development; and health system development and community engagement) and any best practices other states could use in their own Flex programs.

Florida: Study of Hospital Funding and Payment Methodologies for Medicaid When Florida began to transition the majority of its Medicaid program from the traditional fee-for-service model to a managed care model, federal regulations limited the state's ability to continue its practice of providing supplemental payments to Medicaid providers through the Upper Payment Limit (UPL) program. As a means of continuing to provide supplemental payments under its new Medicaid managed care model, the state obtained a section 1115 demonstration waiver to create the Low-Income Pool (LIP) program. In addition to "ensuring continued government support for the provision of health care services to Medicaid, underinsured, and uninsured populations," the LIP program expanded the list of providers available to receive supplemental payments from just acute care hospitals, as under the UPL program, to a variety of other providers, including Federal Qualified Health Centers (FQHC) and Community Health Departments. Similar to, and in conjunction with, Medicaid Disproportionate Share Hospital (DSH) program, payments from the LIP pool are intended to compensate providers for services to uninsured and underinsured patients, as well as to help cover shortfalls between Medicaid payments and actual provider costs. Following an initial pilot program approval period of five years in 2006, the LIP waiver was reapproved in 2011 for an additional three years, through June 30, 2014. Last year, the Center for Medicare and Medicaid Services (CMS) reapproved the LIP program for one year with a condition that the Florida Medicaid agency contract with an independent consultant to conduct a review of the state's funding and payment mechanisms. Furthermore, the review is to produce suggestions for "sustainable, transparent, equitable, appropriate, accountable, and actuarially sound Medicaid payment systems and funding mechanisms that will ensure quality health care services to Florida's Medicaid beneficiaries throughout the state without the need for LIP funding." In 2014, the Florida Legislature added to the CMS conditions by requiring the report to also identify the federal regulations on intergovernmental transfers (IGT), supplemental hospital payments, and direct provider payments, as well as other states using these methods and the special waivers required to do so.

In February 2015, a final report was released detailing a variety of funding and payment options for the state's Medicaid program, including analysis of the mechanisms used by other states. Although the directive applied to the whole Medicaid program, the final report strongly focuses on the state's Medicaid hospital reimbursements because they currently are the recipients of a vast majority of LIP payments. The study also considers the costs to hospitals for the care of uninsured and underinsured patients, as well as the LIP and Medicaid DSH payments for these patients.

The report presents a number of funding and distribution options for Florida to consider as alternatives to its current LIP program, as well as the general and Florida-specific advantages and disadvantages of each. Details on other states currently using the options presented also are included. Page 195 of the report provides a visual representation to show how the different funding sources and payment models summarized below can be combined. Page 145 provides complete profiles on Medicaid funding and payment methods for Alabama, Arizona, California, Illinois, New Jersey, New York, Pennsylvania, Texas, and Washington. Although the options presented in the report are not specifically for funding rural hospitals, the problems associated with Medicaid funding and providing high rates of uncompensated care are particularly applicable to rural healthcare.

The options for funding sources that contribute to a requisite state's share of Medicaid include:

  1. Increase or expand the current provider assessment (p. 164) – The current assessment rate for hospitals in Florida is 1.5 percent of net operating revenue for inpatient services and 1 percent on outpatient services. The state also has a provider assessment 4 for intermediate care facilities for the intellectually disabled and nursing facilities. For state FY2014 and FY2015, Alaska is the only state that does not have some type of provider assessment. During the same period, at least three-quarters of states have assessments on hospitals, intermediate care facilities, and nursing facilities.
  2. Increase general fund revenue appropriated for the Medicaid program (p. 167)
  3. Implement an assessment on managed care organizations (MCOs) (p. 168) –
    1. Current assessments for Medicaid MCO's only: California (3.9375 percent of gross receipts), Michigan (6 percent on medical services provided), Missouri (formulary), Ohio (5.5 percent sales tax on all MCO transactions), and Texas (.0875 percent on gross premiums up to $450,000 and 1.75 percent on additional gross premiums and a maintenance tax of up to $2 per enrollee)
    2. Current assessment for all health insurers in the state: Arizona (2 percent of net premiums), Louisiana (applies to life, accident, health, and service insurance – $140 on annual gross premiums of $7,000 or less + $225 for each additional $10,000 of gross revenue), Michigan (.75 percent of paid claims), and Texas (1.75 percent premium tax and $0.1025 per member per month)
  4. Continue inter-governmental transfers (IGTs) (p. 174) – IGTs currently generate a significant portion of funding for the Florida Medicaid program and fund about 44 percent of the state share of hospital reimbursements and 26 percent of the state share of the Medicaid program overall. However, a waiver for the LIP or other program will be necessary to sustain the same level of IGT funding. California and Texas use DSRIP and uncompensated care pools.
  5. Expand the state's Medicaid program (p. 175)
  6. Utilize certified public expenditures (CPEs) as a financing tool (p. 176) – CPEs are expenditures made by government entities or hospitals and other providers owned or operated by a governmental entity that can be used to document state Medicaid spending for federal match purposes. CPEs are not money transfers, rather they are based on a dollar amount certified by the government provider or entity to the state as the total costs (federal and nonfederal) incurred for providing covered services to Medicaid beneficiaries. States currently using CPEs as a financing tool include Alabama, Arizona, California, Colorado, Florida, Georgia, New York, North Carolina, Tennessee, and Washington.
  7. Establish Designated State Health Program (DSHPs) (p. 179) – DSHPs are "health programs funded entirely by the state, many of which provide safety-net healthcare services for low-income or uninsured individuals such as adult day care, outpatient substance abuse treatment, or care for the mentally ill who are not Medicaid-eligible." Rather than creating new programs, states can use an existing program that traditionally has not been eligible for federal match to receive federal funds. Under a section 1115 waiver, states continue to pay for the programs as they have in the past but can now pull down federal matching funds for reforms defined under the waiver. Examples of state DSHPs detailed in the report include the California Bridge to Reform Demonstration, the New York Federal-States Health Reform Partnership, and the Oregon Health Plan.
The payment method options presented include:
  1. Continue the LIP program (p. 180) – Compared to other states, Florida receives a relatively small amount of federal funds for its Disproportionate Share Hospital (DSH) program. To a degree, the LIP program offsets this deficiency by providing funds to help offset hospital costs for providing uninsured care. While the programs are similar, the DSH program is subject to much more stringent oversight, including annual audits of hospital costs. The report suggests that if the current LIP program is modified to include greater oversight and transparency, CMS might be agreeable to its continued existence.
  2. Increase the Medicaid fee-for-service (FFS) program rates and the capitation rates for Medicaid managed care (p. 181) – Increasing the Medicaid FFS rates for inpatient and outpatient hospital services, assuming FFS payment levels are considered when setting capitation rates, this increase ultimately would translate into an increase in the Medicaid MCO capitation rates. FFS rates are limited by federal regulations that prohibit Medicaid programs from paying more than Medicare would pay for the same service. Medicaid MCO capitation rates are set by a state actuary and generally are based on what is appropriate for populations covered by the plans and services to be furnished. FFS rates can be varied based on different hospital categories to account for different cost structures and Medicaid utilization levels, or they could be set for each hospital based on the amount of IGT funds contributed on the hospital's behalf.
  3. Delivery System Reform Incentive Program (DSRIP) (p. 184) – A DSRIP program allows a state to make incentive payments with the aim of improving health, enhancing patient experience and outcomes, and reducing the per capita cost of care. DSRIP payments are tied to performance-based initiatives or projects with the amount adjusted based on the providers' success in meeting the agreed-upon goals.
  4. Expand the state's Medicaid program (p. 185) – Expansion offers the opportunity to define payments differently for the newly eligible population or the new expansion population could be folded into the existing payment methods to offer greater purchasing power for MOCs.
  5. Use an upper payment limit (UPL) program for individuals still under an FFS plan (p. 186) – This option becomes less viable as states fully transition to managed care models, which cannot use UPLs. States also cannot use a UPL to make direct payments to hospitals for services provided to Medicaid-eligible individuals in a managed care program.
  6. Make supplemental payments for Graduate Medical Education (GME) (p. 187) – GME is the UPL program exception under which CMS allows state Medicaid programs to make supplemental payments directly to teaching hospitals regardless of whether the services are provided as part of a Medicaid managed care program. A 2012 survey found that states with a managed care program and supplemental payment for GME include Arizona, Colorado, Florida, Georgia, Indiana, Kansas, Maryland, Minnesota, Nebraska, New York, Oklahoma, South Carolina, Tennessee, Vermont, Virginia, and the District of Columbia.
  7. Continue using the Disproportionate Share Hospital program (p. 190) – The DSH program, which was created in 1981, allows states to make additional payments to serve a disproportionate number of low-income patients with special needs. However, this may not be a long-term solution if DSH reductions mandated under the Affordable Care Act are implemented beginning in FFY 2016.
  8. Create an uncompensated care pool (p. 191) – States can create a pool of funds including DSH allotments, local or community taxes, and provider fees to finance healthcare delivery for uninsured populations. California and Texas have created an uncompensated care pool as part of their managed care programs alongside their DSRIP programs.
  9. Continue or create a physician supplemental program (p. 192) – States that transition to a fully capitated Medicaid managed care model may be able to continue making supplemental payments directly to physicians for uncompensated services using an uncompensated care pool.
The full report, "Study of Hospital Funding and Payment Methodologies for Florida Medicaid" can be found here.

More information on how the discontinuation of the LIP program could affect Florida can be found here.


1. http://www.shepscenter.unc.edu/programs-projects/rural-health/rural-hospital-closures/

2. 2014-2015 Appropriation Act, Section 33.33, DHHS: Hospital Transformation Plans.

3. http://www.politico.com/story/2015/02/mississippi-telemedicine-115515.html

4. http://kff.org/report-section/medicaid-in-an-era-of-health-delivery-system-reform-provider-rates-and-taxes-or-fees-8639/