Small and rural hospitals may outlast COVID-19. But can they survive Trump’s tax law?

Introduction

Paul Taylor wept when his hospital closed.

It was July 21, 2016, and Taylor, the CEO of a hospital system that owned the Ozarks Community Hospital in Springfield, Missouri, had to lay off 200 employees. The small hospital, which served many low-income residents with no insurance, could no longer afford to stay in business.

The closure didn’t seem that consequential to some. Springfield, a city of 167,000 nestled in a landscape dotted with small farms and surrounded by the Ozark Mountains, has other medical facilities. But Taylor’s community hospital, with just 11 beds when it closed, was special. Located near a census tract where 42 percent of residents live in poverty and nearly one in five is African American, it served a heavy load of patients on Medicare and Medicaid. And 40 percent of the people who came to his emergency room had no insurance at all.

Taylor had bet on Missouri expanding Medicaid under the Affordable Care Act, which would have increased the number of insured patients and, he said, “at least get payment on a lot of that uninsured that we were seeing.” But Missouri chose not to.

The lack of insured patients has wreaked havoc on small and rural hospitals’ balance sheets for years — especially in the states that did not expand Medicaid. Then came the COVID-19 pandemic, which has brought more pain to hospitals everywhere. Even the venerable Mayo Clinic in Rochester, Minnesota, laid off or cut the pay of 30,000 employees nationwide because it had to postpone elective patient care. On top of that, the massive job losses caused by the coronavirus shutdowns have likely caused more than 27 million people to lose their employer-based coverage, with states in the industrial Midwest especially hard hit.

The increase in uninsured patients, the costs of gearing up for the pandemic, and the postponement of nonemergency procedures — the lifeblood of the hospital system — have created a perfect financial storm that threatens to swamp these critical community facilities. Small and rural hospitals are at higher risk because they have fewer patients, fewer revenue streams, and serve populations that are older, sicker, and — even before the present crisis — either underinsured or uninsured.

“They can hardly keep their doors open, so how are they expected to deal with that?” asked Max Isaacoff, government affairs and policy manager at the National Rural Health Association (NRHA), a trade association in Washington, D.C.

Just last month, Decatur County General Hospital in Parsons, Tennessee, succumbed to years of mounting debt, leaving the county of nearly 12,000 residents without an emergency room for COVID-19 — or any other — treatment. It was one of 12 Tennessee hospitals to close since 2012 — 21 counties in the state now don’t have a hospital.

“When rural hospitals close, people die. There is no way around it,” Jeremiah Hodshire, the chief operating officer for Hillsdale Hospital in southern Michigan, wrote in an April open letter to Gov. Gretchen Whitmer asking her to allow hospitals to resume performing elective surgeries, which account for up to 30 percent of revenue, despite the coronavirus shutdowns.

More closures to come

For the small and rural hospitals that survive the pandemic, another gut punch awaits: A provision in the Tax Cuts and Jobs Act signed by President Donald Trump in 2017 repealed the penalty in the Affordable Care Act (ACA), also known as Obamacare, that pushed more people into health insurance. The change took effect January 1, 2019; last year the Congressional Budget Office and the Joint Committee on Taxation predicted the repeal would result in 2 million additional people dropping out of Medicaid and the federally run Children’s Health Insurance Program (CHIP) by 2021, since the mandate effectively encouraged enrollment in all types of insurance. Another 4 million people could drop their private health insurance, and 1 million more could lose employment-based coverage, according to the report.

The result: “You’re going to see record numbers of hospitals close,” Taylor warned.

Tucked into America’s hills and hollows and dotting its plains, are 2,220 rural hospitals. They make up more than a third of the nation’s medical centers and serve mostly older and low-income patients. They tend to be small, with 50 or fewer beds, and offer minor surgeries, obstetrics, radiology, psychiatry, and emergency care. About 300 more hospitals with 50 or fewer beds are in metropolitan areas, but some have petitioned the federal government to be classified as rural hospitals to receive higher payments for treatment.

Rural hospitals are found in all 50 states, but they are concentrated in the Midwest and South, mostly located in small towns. They have an outsize effect on local economies, too. In a rural area, the local hospital is typically the first or second largest employer, according to the NRHA, which estimates that a single rural hospital with fewer than 25 beds employs 141 people on average and has a payroll of $6.8 million.

But rural hospitals are failing at a frightening rate — 172 have closed since 2005 and a record 19 shut their doors in 2019. Twelve more have shuttered already in 2020, according to the North Carolina Rural Health Research Program (NC RHRP). These little hospitals typically have thin operating margins; 47 percent run in the red, according to the NRHA. Another 453 were already at risk of closing before the coronavirus pandemic hit, according to the Chartis Center for Rural Health (CCRH), a health care analytics firm.

“Typically, these hospitals have been losing money for year after year after year after year,” said George Pink, deputy director of NC RHRP. “They draw down their reserves; they sell off property; they borrow to the max; they have fundraising in the community. And then finally they run out of options.”

Obamacare was supposed to fix the financial strain. It expanded Medicaid, making 12 million more Americans earning up to 138 percent of the poverty level eligible. That was a big increase over the previous limits in most states, where poor adults with no children could not qualify for Medicaid at all. A 2012 Supreme Court ruling, however, gave states the option of joining the program. To date, 36 states and the District of Columbia have opted to expand Medicaid, while 14 states have not.

In the expansion states, the rate of uninsured people in rural areas fell from 35 percent to 16 percent. But Missouri, where Taylor’s Ozarks Community Hospital operated, chose not to expand, leaving 35 percent of its rural adults uninsured. Missouri is not alone: In seven other non-expansion states, more than a third of low-income adults in small towns and rural areas are uninsured.

A 2018 study by researchers at the Colorado School of Public Health found that hospitals in expansion states were less than one-sixth as likely to close than hospitals in non-expansion states, results they said were especially significant for rural hospitals. In another study, the Georgetown University Health Policy Institute reported in 2016 that a community health center went from a $2.5 million loss to a $2.5 million surplus the year after its state expanded Medicaid. The institute didn’t identify the hospital. Other hospitals in the study reported increases as well.

Falling Medicaid rolls

Technically speaking, Taylor’s hospital was not “rural,” because it was on the outskirts of a metropolitan area. But Taylor says in many ways it met the profile: It was small, served a population of elderly and low-income people, and had a high number of uninsured. The hospital sat on a 25-acre lot on the north end of Springfield, three miles from the city center, surrounded by modest, one-story homes, and large, grassy lots.

By not fitting the federal government’s definition of rural, Ozarks Community did not qualify for higher Medicare reimbursements designed to prop up small, rural hospitals. But it faced a bigger obstacle. The Centers for Medicare and Medicaid Services (CMS) had been urging hospitals to turn more inpatients into outpatients to cut costs. So, Taylor reduced his inpatients. But then, in 2013, CMS began to argue that Taylor’s operation did not have enough inpatients to qualify as a hospital and threatened to — and eventually did — stop paying for his Medicare patients.

As his hospital teetered on the edge of insolvency, Taylor lobbied politicians and state officials to expand Medicaid in the state. If it did so, more patients would be insured, and Taylor felt he could increase patients — and revenue — at his tiny inpatient unit and satisfy CMS.

“I would have been able to fight back,” Taylor said.

It was an uphill, and in the end, a losing battle. In 2014, the Missouri House and Senate each voted down amendments to expand Medicaid, which would have added 300,000 residents to the health-insurance rolls. Opponents cited fraud and waste in the program as well as their general opposition to Obamacare. Months later, the Missouri Budget Project, a think tank in St. Louis, estimated Medicaid expansion would add more than $100 million to state coffers. Since the vote, eight of Missouri’s rural hospitals, plus Taylor’s, have closed. Lists and definitions vary, but the state’s rural hospital count may now be as low as 60.

Medicaid and CHIP enrollment numbers have been shrinking nationwide since they peaked at 75.1 million in March 2017. A Public Integrity analysis of data from the Kaiser Family Foundation found a decline of 4.9 million, or 6.5 percent of Medicaid and CHIP enrollees, from the March 2017 high to January 2020, the most recent month for which numbers are available. Some argue the drop was due to more people getting employment-based insurance during that period of economic expansion, but research has disputed that claim.

The more likely causes, experts say, were efforts by the Trump administration and conservative states to trim enrollment. For instance, in 2018 and 2019 Missouri cut the number of parents and children on Medicaid by 126,000 when it employed a renewal process that was seriously flawed, one of its state agencies reported.

Other states, encouraged by the Trump administration, are trying new tactics. They include getting waivers to restrict Medicaid to residents who have a job, are in school, volunteer, or are training for a job. Ten states were granted such waivers and 10 more approvals are pending. Arkansas received one. In March 2019, a federal judge blocked Arkansas’ restrictions but not before 18,164 residents lost their insurance coverage. Courts blocked similar waivers in Michigan, New Hampshire, and Kentucky, and other states are waiting to see how higher courts will rule.

Trump’s 2020 budget calls for further cuts to Medicaid, and a new administration accounting rule proposed in November would reduce federal Medicaid payments to hospitals by as much as 16.9 percent, the American Hospital Association calculated. “Entire communities could lose access to care under this proposal, especially in rural areas,” according to a joint statement issued by the AHA and the American Health Care Association.

On April 1, Trump said he might consider expanding Medicaid to help the 30 million Americans without insurance during the pandemic. Trump hasn’t moved to expand Medicaid, but he did sign a pandemic stimulus bill that would boost federal matching money for Medicaid by up to $50 billion over the next two years. And three of the recently passed pandemic relief laws will reimburse hospitals for the cost of testing and treating the uninsured for the coronavirus.

People who lost their jobs and insurance in the pandemic can apply for Obamacare, and 11 states and the District of Columbia have created special ACA enrollment periods for them. Yet Trump has rejected calls to reopen the Affordable Care Act to the otherwise uninsured, and his administration still backs a lawsuit, filed by Texas and other states, to dismantle Obamacare in its entirety.

In 2018, even though the individual mandate’s repeal had not yet taken effect, the budget office and joint committee estimated 1 million people dropped their health insurance because they mistakenly thought it no longer applied.

The association between the mandate and Medicaid enrollment was complicated, but researchers at the Commonwealth Fund, a private foundation that studies health care issues, say it was real. They listed seven ways — such as citizens’ desire to comply with the law — that Obamacare and its mandate pushed people into Medicaid. Eliminating the mandate will discourage Medicaid enrollment, they argued, by as much as 7.5 million people and all medical insurance by up to 13 million by the end of 2020.

If the estimates are correct, the repeal of the mandate may have a greater effect on reducing the ranks of the insured than the Trump administration’s and states’ efforts to cut Medicaid spending.

It is already being felt.

“We are hearing from our members about growing numbers of underinsured individuals, and I think that is a result of… the repeal of the individual mandate” and weaker insurance coverage that the Trump administration is promoting, said Beth Feldpush, senior vice president of policy and advocacy at America’s Essential Hospitals, which represents 300 hospitals that care for uninsured and low-income patients.

Financially stable, for now

If anyone knows about the effects of shrinking Medicaid rolls on small and rural hospitals, it is Taylor, the CEO of OCH Health Systems. The hospital his company owned in Springfield failed, but another it owns, 80 miles across the border in Gravette, Arkansas, is financially stable. Its operating costs remain low, due to efficiencies and a small staff, and it sees only a limited number of uninsured patients.

The coronavirus epidemic gave the hospital a big scare, though. Adding more beds in case of a patient surge, buying ventilators and protective equipment, and shutting down surgeries and other procedures, meant the hospital would fall about $2.5 million short of covering its April costs. But as the hospital teetered, two federal bailout loans and some additional money from CMS came through. “The bottom line is, the Gravette hospital will make it,” Taylor said.

It wasn’t always clear that it would. The hospital in Gravette (rhymes with rabbit) was opened in 1951 as Gravette Medical Center on Main Street. By 1975, the red-brick building had expanded to 99 beds. But it began to struggle as Medicare and Medicaid tightened their reimbursement rules in the 1980s, cutting into hospital revenues. The hospital closed its doors in 2005. The town, with a population of about 2,000 at the time, suffered economically when people lost the jobs it had provided. Mayor Kurt Maddox of Gravette said: “I’m sure some of them probably didn’t find a job till the hospital opened back up.” The next nearest hospital was a 40-minute ambulance ride away.

A couple of years later, Taylor took notice of the shuttered hospital. His OCH Health Systems owned more than a dozen clinics in Missouri and Arkansas, including the hospital in Springfield. But unlike that hospital, the one in Gravette could qualify as a Critical Access Hospital, a federal designation for small hospitals more than 35 miles from the nearest medical center. Critical Access Hospitals can qualify for Medicare reimbursements that pay 101 percent of the actual costs of patient care — special treatment that helps keep such hospitals solvent.

OCH bought the Gravette hospital in 2008 and made it a critical access hospital with 25 beds. It added two clinics, one for family care and another that specializes in surgery, pain management, and orthopedics. In 2013, then-Arkansas Gov. Mike Beebe expanded Medicaid. By mid-2015, according to the Arkansas Center for Health Improvement, the state’s uninsured rolls had dropped by 13 percent, which helped all hospitals’ bottom lines.

The Gravette medical complex’s workforce grew to 350 people, making it one of the town’s largest employers. Pay is good — $35 an hour for registered nurses, for instance. According to OCH’s website, its two clinics employ 15 doctors and nurse practitioners. Taylor said the main difference between the Springfield hospital’s finances and those at Gravette is that Arkansas expanded Medicaid and Missouri did not. His theory is supported by data from a September 2018 study by Georgetown University and the NC RHRP. It found the number of uninsured rural people in Arkansas fell from 45 percent to 22 percent between 2009 and 2016, largely due to the state’s Medicaid expansion. Taylor says the uninsured patient rate in the Gravette ER runs about 5 percent, compared with the 40 percent uninsured rate among patients at the Springfield hospital before it closed.

“The truth is, I have a viable, sustainable operation” in Gravette, Taylor said.

But the hospital, he said, is operating on razor-thin margins. Anything that cuts into that — like the COVID-19 pandemic — will threaten its survival.