To Convert or Not to Convert: Our Take on Rural Emergency Hospitals

In response to the wave of rural hospital closures and financial difficulties, Congress created a new Medicare provider designation, the Rural Emergency Hospital (REH). The new designation was created in the Consolidated Appropriations Act of 2021, enacted December 27, 2020. REHs are designed to maintain critical emergency department and outpatient services in communities where small local hospitals or critical access hospitals are threatened with closure due to financial difficulties. The idea is that this new designation will allow some rural hospitals to continue operating outpatient and emergency services by cutting the costs it takes to operate inpatient services and through additional financial support from CMS. Some rural hospitals have already started the process of converting into an REH. However, for most facilities, the decision to convert will be difficult and nuanced.

Rural Hospital Closures

Over the past decade, there has been a growing concern that the closure of rural hospitals and critical access hospitals are leading to a lack of health care services for people living in rural areas. Since 2010 more than 140 rural hospitals across the country have closed. The facilities that have managed to stay open are still facing financial difficulties, and over 400 remain vulnerable to closing. While there have been different proposals offered to help rural hospitals stay open, Congress adopted one approach in the Consolidated Appropriations Act of 2021 — the Rural Emergency Hospital Medicare Designation. The goal of the REH designation is to help rural hospitals stay open, in a modified form to provide the most essential services to the community, by providing an additional reimbursement under Medicare and a monthly subsidy.

Overview of Rural Emergency Hospitals

Critical access hospitals or rural hospitals with 50 or fewer beds that were open as of December 27, 2020, may be eligible to convert to an REH. Hospitals that closed after December 27, 2020, are also eligible to convert and reopen as an REH. REHs are meant to provide emergency department services and observation care but not inpatient services. The annual average patient length of stay for an REH should not exceed 24 hours. REHs may provide outpatient services, but should not provide acute care inpatient services, subject to a few exceptions. REHs must staff their emergency departments 24/7 and have a physician, nurse practitioner, physician’s assistant or clinical nurse specialist available at all times. REHs must also have a transfer agreement with a level I or level II trauma center.

In order for a facility to convert, it must be licensed under state law as an REH. This means only facilities in states that have adopted REH licensure laws can convert. So far, 10 states have enacted laws enabling REH licensure, including Arkansas, Illinois, Iowa, Kansas, Michigan, Nebraska, New Mexico, South Dakota, Texas and West Virginia. Missouri currently has an REH licensure bill under consideration.

As of January 2023, eligible hospitals that wish to convert must submit an application to the Centers for Medicare and Medicaid Services that includes an action plan for initiating and providing emergency services. This plan should include the specific services the facility will retain, modify, add and discontinue, along with details on how the facility will use the additional funds from Medicare.

Pros and Cons of Conversion

Pros

The main benefit of conversion to an REH is that it could allow a struggling facility to stay open through financial support and a reduction in services leading to lower costs. REH reimbursements under Medicare will equal the outpatient prospective payment plus 5%. The additional 5% will not impact what patients owe under co-pays. REHs will also get a monthly subsidy of $272,866 ($3,274,392 annually) — this additional revenue, along with the savings from not operating an inpatient care program, could also allow a facility to expand its outpatient care services.

Access to health care in rural areas is scarce, and REH conversion could allow struggling facilities to stay open — providing continued health services in their communities. The closing of a facility can have negative effects beyond the provision of health care services, as rural hospitals are a major source of employment for many communities. Conversion to an REH could allow a facility to stay open and employ members of the local community.

Cons

REHs are not a perfect solution to rural health facilities’ financial problems. The requirements of the program could actually cause some rural facilities to lose money. A facility that converts would lose all of its inpatient revenue. Moreover, as a result of losing inpatient services, it’s possible that, even with an expansion of outpatient services, REHs would need less staff and end up employing less people than they would with inpatient services. REHs are also not eligible to participate in the 340B program, so a facility that participates in the program would lose the drug savings and retail pharmacy revenues. In addition, since REHs cannot provide inpatient services, people in the community would have to travel farther to access those services.

Hospitals in the Best Position to Convert

There are more than 1,700 rural hospitals eligible for conversion. A few hospitals in Texas, New Mexico and Oklahoma have already submitted applications to convert, but it is unclear how many will follow suit. The decision to convert largely comes down to math. Will the increased 5% reimbursement plus the monthly subsidy provide enough of a financial benefit to offset the loss of inpatient and 340B Program revenue?

A facility considering converting should consider the following factors in a cost-benefit analysis:

• Facility profitability
• Net patient revenue
• Inpatient care utilization and revenue
• Emergency department and outpatient services utilization and revenue
• Participation in the 340B Program
• Potential Reduction of Medicaid reimbursement

A facility in the most advantageous position to convert would be a small, independent hospital that: already primarily serves a community primarily through emergency department services and outpatient care; has experienced multiple years of sustained unprofitability; has low inpatient care utilization and low inpatient revenue; and does not participate in the 340B program. A hospital that looks like this would benefit greatly from the additional 5% reimbursement and monthly subsidy, and would not be losing that much revenue from cutting inpatient services. In addition, there is no lost income from the 340B Program. 

Conversely, larger hospitals that have higher inpatient utilization and revenue, lower emergency department utilization, and that participate in the 340B Program are less likely to benefit from converting. The additional 5% reimbursement and monthly subsidy may not offset the loss of revenue from inpatient services and the 340B Program enough to make converting beneficial from a financial perspective.  Additionally, in some cases, converting could actually result in annual losses.

One additional consideration is Medicaid reimbursement. It is not clear yet how Medicaid will reimburse REHs. Medicaid supplemental payment systems are often structured on inpatient beds; if a facility relies heavily on Medicaid, that could be a deterrent to an REH conversion.

Our Takeaway

The new REH designation was created to help financially struggling rural health facilities that are struggling financially remain open, but it is not a perfect solution. Several studies have estimated that between 60 and 80 rural facilities out of the 1,700 eligible facilities may be well-suited to convert to an REH, partly due to the limited number of states that have enacted REH licensure laws. In those communities, REHs could have a significant impact, as it allows health facilities to continue to provide access to health care and be a source of employment. However, REHs are not going to be the savior for rural healthcare in every community. For most facilities, REHs should be looked at as one more option rural facilities should consider as they seek to stay open amid the wave of closures.