Rural hospitals take spotlight in coverage expansion debate

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Opponents of the public option have funded an analysis that warns more rural hospitals may close if Americans leave commercial plans for Medicare.

With the focus on rural hospitals, the Partnership for America’s Health Care Future brings a sensitive issue for politicians into its fight against a Medicare buy-in. The policy has gone mainstream among Democratic presidential candidates and many Democratic lawmakers.

Rural hospitals could lose between 2.3% and 14% of their revenue if the U.S. opens up Medicare to people under 65, the consulting firm Navigant projected in its estimate. The analysis assumed just 22% of the remaining 30 million uninsured Americans would choose a Medicare plan. The study based its projections of financial losses primarily on people leaving the commercial market where payment rates are significantly higher than Medicare.

The estimate assumed Medicaid wouldn’t lose anyone to Medicare, and plotted out various scenarios where up to half of the commercial market would shift to Medicare.

The analysis was commissioned by the Partnership for America’s Health Care Future, a coalition of hospitals, insurers and pharmaceutical companies fighting public option and single-payer proposals.

In their most drastic scenario of commercial insurance losses, co-authors Jeff Goldsmith and Jeff Leibach predict more than 55% of rural hospitals could risk closure, up from 21% who risk closure today according to their previous studies.

Leibach said the analysis was tailored to individual hospitals, accounting for hospitals that wouldn’t see cuts since they don’t have many commercially insured patients.

The spotlight on rural hospitals in the debate on who should pay for healthcare is common these days, particularly as politicians or the executive branch eye policies that could cut hospital or physician pay.

On Wednesday, Sen. Elizabeth Warren (D-Mass.) seemingly acknowledged this when she published her own proposal to raise Medicare rates for rural hospitals as part of her goal to implement single payer, or Medicare for All. She is running for the Democratic nomination for president for the 2020 election.

“Medicare already has special designations available to rural hospitals, but they must be updated to match the reality of rural areas,” Warren said in a post announcing a rural strategy as part of her campaign platform. “I will create a new designation that reimburses rural hospitals at a higher rate, relieves distance requirements and offers flexibility of services by assessing the needs of their communities.”

Warren is a co-sponsor of the Medicare for All legislation by Sen. Bernie Sanders (I-Vt.), who is credited with the party’s leftward shift on the healthcare coverage question. But she is trying to differentiate herself from Sanders, and the criticisms about the potentially drastic pay cuts to hospitals have dogged single-payer debates.

Most experts acknowledge the need for a significant policy overhaul that lets rural hospitals adjust their business models. Those providers tend to have aging and sick patients; high rates of uninsured and public pay patients over those covered by commercial insurance; and fewer patients overall than their urban counterparts.

But lawmakers in Washington aren’t likely to act during this Congress. The major recent changes have mostly been driven by the Trump administration, where officials just last week finalized an overhaul of the Medicare wage index to help rural hospitals.

As political rhetoric around the public option or single payer has gone mainstream this presidential primary season, rural hospitals will likely remain a talking point in the ideas to overhaul or reorganize the U.S.’s $3.3 trillion healthcare industry.

This was in evidence in May, when the House Budget Committee convened a hearing on Medicare for All to investigate some of the fiscal impacts. One Congressional Budget Office official said rural hospitals with mostly Medicaid, Medicare and uninsured patients could actually see a boost in a redistribution of doctor and hospital pay.

But the CBO didn’t analyze specific legislation and offered a vague overview of how a single-payer system might look, rather than giving exact numbers.

The plight of rural hospitals has been used in lobbying tactics throughout this year — in Congress’ fight over how to end surprise medical bills as well as opposition to hospital contracting reforms proposed in the Senate.

And it has worked to some extent. Both House and Senate committees have made concessions to their surprise billing proposals to mollify some lawmakers’ worries.


Many fear Hahnemann’s story will send a message: Buying a failing hospital pays

Many fear Hahnemann’s story will send a message: Buying a failing hospital pays

Hahnemann University Hospital. (Emma Lee/WHYY)

Philadelphia Academic Health System, the company that owns Hahnemann University Hospital, is in bankruptcy proceedings, but the hospital’s real estate is not included in the filing. That has sparked outrage from the nurses union, City Council, and even presidential hopeful Bernie Sanders. They say it shows the owner had a plan all along: let the hospital fail, and sell it for its  valuable Center City location.

Indeed, California investment banker Joel Freedman, CEO of Philadelphia Academic Health System, separated out the land beneath the hospital and its adjacent, related buildings from the operating business itself, as is common in private equity purchases.

In fact, that’s how private equity is supposed to work: Big firms buy struggling companies with the promise of financial support, and to improve their operations and business strategy. When things go right, the business succeeds, and the private equity firm sells it in a public offering or to another bidder for more than it paid.

In other cases though, the process is not so successful. Private equity firms often load companies up with debt, take dividends out for themselves, sell off valuable real estate, and charge monitoring fees and interest on their loans, leaving a company in a much weaker position than it would have been otherwise, and often on the verge of bankruptcy.

“The house never loses,” said Eileen Applebaum, co-director at the Center for Economic and Policy Research. “The private equity firm makes money whether the company succeeds or it doesn’t.”

Freedman formed Philadelphia Academic Health System to run the hospital. His California private equity firm is called Paladin Healthcare, and he has previously bought and managed hospitals in California and Washington, D.C. At the end of June, Freedman announced that Hahnemann, the 496-bed hospital at the corner of Broad and Vine streets, would close. In early July, Philadelphia Academic Health filed a Chapter 11 bankruptcy petition.

Applebaum, who has taught economics at Temple University and is a native Philadelphian, said that if Paladin Healthcare had really wanted to save the hospital, there are a few things it should have tried.

The most obvious, she said, would have been to diversify its payer mix. One of the reasons Hahnemann failed financially is because two-thirds of its patients were on Medicaid or Medicare — publicly funded insurance plans that reimburse hospitals for care at lower rates than private insurance does. Applebaum said it’s common for hospitals in areas with high rates of patients on public insurance to buy up smaller hospitals in the suburbs, or in other areas that attract more patients on private insurance.

“You see Thomas Jefferson University outpatient-care centers everywhere, you see smaller suburban hospitals that are part of the Thomas Jefferson system,” she said. “Yes, you want to serve the less well-off communities, but you have to balance that with other communities. Everybody knows this, this is not a mystery.”

Because this strategy is common, the fact that Freedman didn’t try it makes Applebaum dubious that he really wanted to save Hahnemann.

“It does not really appear that they made a good-faith effort to turn this hospital around,” she said.

Freedman declined to comment for this story, but he has said in previous statements that he tried to sell the hospital to a nonprofit, and that he asked the city and state for money to keep it open.

The imbalanced payer mix is not as much of an issue at St. Christopher’s, the 188-bed children’s hospital in North Philadelphia that is also run by Philadelphia Academic Health System. It reported a $58 million pretax profit last year and is not closing.

That’s because almost all kids in the United States have insurance through Medicaid or CHIP, a federal program. Even though those reimbursement rates are also lower than private insurance would pay, children’s hospitals are more accustomed to that, and they adjust their operations accordingly.

“Pediatric hospitals, particularly those who serve a low-income population like St. Christopher’s, have learned how to operate on a Medicaid budget, so to speak, and have found ways to be more efficient and work within that coverage in a way that a lot of hospitals that primarily serve adult patients maybe haven’t had to,” said Lisa Bielamowicz, co-founder of Gist Healthcare, a D.C.-based health care consulting firm.

Last week, a judge in U.S.  Bankruptcy Court in Wilmington gave the green light for hospital systems to bid on St. Christopher’s. A consortium of four health care systems has already expressed interest.

“There’s also an element of wanting to preserve the competitive dynamic and capacity for that care in the market by preserving St. Christopher’s, so that Philadelphia doesn’t become a one-horse town for specialty children’s care,” said Bielamowicz.

Losing St. Chris would leave only Children’s Hospital of Philadelphia for inpatient pediatric care. In 2018, two-thirds of the revenue at St. Christopher’s was from Medicaid. It was half that amount at CHOP.

Bielamowicz added that it would be in the best interest of the local systems to take on St. Chris, so vulnerable children didn’t end up in those hospitals’ regular emergency rooms, many of which are at capacity, without the proper resources to care for them.

St. Christopher’s will be auctioned off to the highest bidder, and the bankruptcy judge is expected to approve the sale in September. The hospital’s Erie Avenue site also was not included in the bankruptcy filing.

Hahnemann Hospital’s property — owned by Broad Street Healthcare, the holding company set up by Freedman — totals about 1 million square feet and, according to city records, has a market value of $58 million.

Brad Molotsky, a partner with the law firm Duane Morris who formerly worked as general counsel for Brandywine Realty Trust, said the downtown neighborhood shows promise for developers, but only ones with deep pockets.

“If you rebuilt a million square feet at 500 bucks a square foot, that’s a big ticket,” he said.

Applebaum, of the Center for Economic and Policy Research, said she is worried that a separate sale of the Hahnemann property to a developer will lay a road map for private equity firms around the country: Buy older hospital in areas that are gentrifying, separate the hospital from its real estate, let the hospitals go downhill, and then sell the real estate to the developers.

“It won’t matter that they lose money in the bankruptcy on the hospital, because they’re going to make so much money on the real estate,” she said.

Another Democratic presidential candidate, U.S. Sen. Elizabeth Warren, has released a plan that would force private equity firms and funds to share the responsibility for the debt the companies they buy take on in the financial restructuring process. As it stands now, neither Paladin Healthcare, the parent company, or MidCap Financial, which loaned purchase and operating funds to Philadelphia Academic Health System, are on the hook for any of its debt.

“It’s like you bought your neighbor’s house, you got a big mortgage when you bought your neighbor’s house, but it’s your neighbor who has to pay back the mortgage,” said Applebaum.

“So that’s a sweet deal if you can get it.”




Seventy two percent of all rural hospital closures are in states that rejected the Medicaid expansion

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States that refused Obamacare’s Medicaid expansion are hemorrhaging hospitals in rural areas.

Roughly 20 percent of Americans live in rural areas, including more than 13 million children, according to the last U.S. census. And, according to research and reporting by the Pittsburg Morning Sun and its parent company, GateHouse Media, those people have been steadily losing access to hospitals for years.

In Oklahoma, Georgia, South Carolina, and Mississippi, at least 52 percent of all rural hospitals spent more money than they made between 2011 to 2017. In Kansas, it’s 64 percent, and five hospitals there shut down completely in that time. Since 2010, 106 rural hospitals have closed across the country. (Another 700 are “on shaky ground,” and about 200 are “on the verge of collapse,” according to Gatehouse.) Of those 106 that closed, 77 were in deep red states where local politicians refused the Obama administration’s Medicaid expansion that came about as a result of the Affordable Care Act.

In short, the federal government provided funds to expand coverage for Medicaid, a program that helps pay for health care for low income patients. But the expansion was optional, and 14 Republican-controlled states rejected to take the money. The only state that bucked this trend was Utah, where rural hospitals were among the most profitable in the country thanks to a policy of shifting funds and resources from urban hospitals. Only 14 percent of rural hospitals operated at a loss and none shut down over the same time period.

The number of rural hospitals has been shriveling for some time now: more than 200 rural hospitals closed between 1990 and 2000, according to a report from the Office of Health and Human Services. Since rural areas have been losing hospitals for decades already, every additional closure is more devastating. And even the hospitals that remain open are struggling to stay fully staffed. According to the Health Resources and Services Administration, rural parts of the U.S. need an additional 4,022 doctors to completely close their coverage gaps.

Just refusing the Medicaid expansion alone doesn’t completely account for the hundreds of rural hospital closures across Republican-controlled states. For one thing, medical treatment and technology has gotten more advanced. Dr. Nancy Dickey, president of the Rural and Community Health Institute at Texas A&M, told Gatehouse, “Most of what we knew how to do in the 1970s and 1980s could be done reasonably well in small towns. But scientific developments and advances in neurosurgery, microscopic surgery and the like required a great deal more technology and a bigger population to support the array of technology specialists.” As a result, the number of services that rural hospitals offered started to shrink, while at the same time rural populations dwindled as both jobs and young people moved away. What’s left were older, poorer populations that needed more medical care and had less money to pay for it. In that situation, hospitals can’t generate enough revenue to stay open, let alone enough to pay the salaries of even new doctors, who carry an average of $200,000 in student debt.

Still, if the state legislatures and governors had accepted the money, billions of dollars could have gone to improving insurance coverage and propping up the hospitals’ bottom lines. In a health-care industry where the average CEO pay is $18 million a year, hospitals have to produce a lot of money to justify their existence to shareholders. The Medicaid expansion was one of the few lifelines available to rural Americans, and their politicians snubbed it.



Hospital profitability down as operators lack flexibility to cut costs, Kaufman Hall says

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Dive Brief:

  • Hospital profitability declined for the first time this year during the month of June. Operating margins were down 1.88%, according to a new flash report from Kaufman Hall.
  • Analysts blamed the decline on the inability of many hospitals to rapidly cut expenses to match a decrease in patient volumes. Bad debt and charity care expenses were also up.
  • Meanwhile, non-labor expenses per adjusted discharge rose 5.3% compared to June 2018, while labor expenses per adjusted discharge increased 4.9%.

Dive Insight:

Hospital and healthcare system operations are often so large and complex that at times they can’t act quickly to address declines in profitability. Based on the most recent Kaufman Hall flash hospital report, June 2019 appears to be one of those times.

The report concluded hospitals lacked the flexibility to cut costs as patient volumes decreased. In June, adjusted discharges, patient days and emergency department visits dropped more than 5% compared to May 2019. Operating room minutes declined by 7% compared to May and are down 1.8% year over year, a trend the report said was “most concerning.” At the same time, expenses rose significantly compared to June 2018.

There were some exceptions. Hospitals with 500 beds or more saw an increase in pre-tax profit margins for the third consecutive month, which the report attributed to increased revenues. Smaller hospitals ( fewer than 25 beds and 200-299 beds) also had improved margins, which was connected to increased inpatient volumes. However, mid-sized hospitals (300-499 beds) saw the biggest decline in profitability, while those in the 100-199 bed range also struggled.

Hospitals in the South also fared better than average, which the report attributed to “strong expense management during a period of stagnant volume growth.” By comparison, hospitals in the Midwest, where revenues were flat while bad debt and labor costs were on the rise, had pre-tax margins that were nearly 3.7% lower.

But the report also suggested that most hospital operators are not seeing the big picture. “Nationwide, hospitals continue to be overly optimistic about inpatient volumes, while underestimating the increase in ambulatory care,” it said.

Hospitals also face other potential headwinds: The upcoming Physician Payment Fee Schedule from CMS may not be favorable to providers; federal legislation to end surprise medical bills could wind up being enacted in law; and the courts could wind up striking down the Affordable Care Act, leaving some 20 million Americans without health insurance.

The report concluded “a lack of flexibility is a fundamental risk to hospitals and health systems and something that industry disruptors are likely to use to their advantage in the coming months and years.”




4 health systems team up to save Philadelphia hospital

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Four healthcare organizations based in Philadelphia have created a consortium to collectively negotiate with American Academic Health System for the potential purchase of St. Christopher’s Hospital for Children in Philadelphia.

St. Christopher’s, along with Philadelphia-based Hahnemann University Hospital, was included in a June 30 Chapter 11 bankruptcy case filed by Philadelphia Academic Health System, a subsidiary of AAHS.

The four consortium institutions — Einstein Healthcare Network, Jefferson Health, Philadelphia College of Osteopathic Medicine and Temple Health — said July 17 they plan to submit a letter of intent to AAHS for the purpose of keeping St. Christopher’s open.

“In a time of difficult transition for healthcare in Philadelphia, four healthcare organizations stepping up to do what’s right by St. Christopher’s patients is truly emblematic of neighbors helping neighbors,” said Achintya Moulick, MD, CMO at St. Christopher’s as well as its chairman of cardiothoracic surgery. “This will ensure continuity of care and service to the children of the community it serves, especially the underserved population.”

The four healthcare organizations formed the consortium as AAHS continues to wind down services at Hahnemann University Hospital. Under a closure timeline released July 16, Hahnemann will shut down Sept. 6.