It’s tough for healthcare organizations to make it right now, especially in communities like Salem, Missouri, that have a large population of Medicaid and Medicare patients. Salem Memorial Hospital (SMH) is no exception to this. SMH is a critical access hospital (CAH), which means it is located in an area that isn’t large enough to support a traditional hospital.
Medicare rules used to be beneficial for critical access hospitals. CAHs don’t have the advantage of economies of scale, because of their size. A CAH has to have many of the same services as a “regular” hospital, including laboratory, radiology, emergency, etc. It can be very difficult to support these ancillary departments in a lower volume rural area, which is why the critical access hospital designation was created by Medicare.
How is a Critical Access Hospital Paid?
CAHs are reimbursed differently than other hospitals. A “regular” hospital is paid under the Medicare “Prospective Payment System,” or PPS, on a “fee for service” basis. This means that they get paid a fixed amount for each service they perform. A simplified example is this:
Medicare sets the price to take care of a patient for one day at $1000. A PPS hospital must provide all of the services needed for that patient with that $1000 dollars. If they only spend $900 to take care of the patient, then they will make $100. This incentivizes a PPS hospital to see many patients, reduce their costs, and make more money.
Built-in Losses
On the other hand, CAHs are reimbursed on the actual costs. At the end of the year, with the help of an accounting firm, a “tax return” called the Medicare Cost Report, looks at all of the services and expenses the CAH actually spent to take care of the patients for the year. Medicare then reimburses the hospital 101% of these allowable expenses.
This sounds great for the CAH, because we know as a smaller and more rural hospital, a CAH won’t have the ability to build economies of scale to reduce costs. But in the last several years, there has been a catch. Since the sequestration started in 2013, there has been a federal order for Medicare to reduce payments to CAHs by 2%. This means that a CAH only gets paid for 99% of the actual costs to provide the services.
It doesn’t take a business degree to see the problem here. In this situation, no matter what the CAH does, it cannot make money and cannot break even on Medicare patients. A CAH will always lose money on Medicare patients. This doesn’t even account for the fact that Medicare patients themselves (or their supplemental insurances) are still required to pay 20%, and a lot of this money will never be collected.
Example using Fictional Costs
To illustrate this point, consider a fictional hospital visit that costs the hospital $10,000 in total costs. Medicare reduces this amount to 99% of costs, so right off the top, the hospital loses $100 on the $10,000 visit. Medicare then pays the hospital their 80%, or $7,920. The patient is responsible for the remaining $1,980. On average, 35-50% of this will be collected and the rest will end up as bad debt. Assuming a 50% coinsurance collection rate, this means the hospital will end up collecting only about $8910 of their $10,000 costs, resulting in a loss of $1,090. This is how Medicare is designed.
Making up the Losses
This loss has to be made up somewhere else. For successful hospitals, it comes from a strong base of patients who have commercial or employer sponsored health insurance. These plans typically pay better and there is the possibility of making money for those patients. Herein lies the problem for Salem Hospital and others like it.
Dent County, and the surrounding areas, are largely rural and are some of the most impoverished areas in Missouri. The vast majority of SMH’s patients are Medicare or Medicaid patients, and there’s very little that can be done to change that. SMH and other critical assess hospitals with large Medicare populations are quite literally designed to fail. This needs urgent congressional intervention to fix, or more CAHs will fail in the coming years.
All Kinds of Hospitals Are Struggling
It’s not just CAHs that are struggling. PPS hospitals are having trouble as well. Expenses, especially salaries, have increased dramatically over the last few years. Medicare PPS payments, as percentage of actual costs, have decreased from 99% in 2000 to 87% in 2018. Commercial payments, on the other hand, are up to 144% of cost as of 2018. PPS hospitals that have a large percentage of Medicare patients will lose money as well.
Some hospitals in urban areas may be able to somewhat “choose” their clientele by providing different services or by marketing to try to draw in the commercial insurance population. But, a small community hospital in a rural area, doesn’t have the ability to open a plastic surgery wing or draw from a larger, healthier population. In short, they cannot change the demographics of the community they serve.
Other Losses
Certain other services are vital, but don’t make money. Salem Memorial Hospital runs an ambulance service, but insurance companies do not pay for so-called “dry runs,” which is when an ambulance is called but a patient isn’t transported to the hospital. For SMH, this is about 33% of all ambulance calls. However, this is a vital community service, and the losses on these calls that can’t be reimbursed must be absorbed by the hospital at large.
Salem Memorial Hospital announced on December 11th, 2023, that it will be winding down operations in home-health and dialysis, two departments that lose money every year, based on advice from the Hospital’s auditing firm. According to publicly available financial statements, SMH has only 27 days of cash-on-hand, and it has been decreasing overtime due to consistent losses. SMH and other hospitals will continue to have to make difficult decisions due to the environment they find themselves in.
Rural Closures
This is why 181 rural hospitals have closed since 2005; 64 of which were critical access hospitals. USA news reports that 10 rural hospitals have closed in Missouri alone over this time period. Our healthcare system is failing right before our eyes, at least for the areas of the country that are already disadvantaged economically and socially, like rural Missouri. Many wealthy hospitals in urban and suburban areas are doing fine.
What to Do?
Operational Changes
Rural hospitals will have to shed services which don’t make money in order to survive. This can slow the bleeding and buy the hospital more time, but the fact remains that in an environment where it is impossible to make a profit, the permanent fix must come elsewhere.
Medicare Changes
Medicare is a federal program, and thus, changes to it are the responsibility of Congress. Our Senators and Representatives must immediately take action to prevent further closure of rural hospitals and other hospitals heavily dependent upon Medicare. The system is designed for hospitals to fail, and when they do, they leave a gaping hole in the services desperately needed in a community.
Local Support through Taxes
Locally, many hospitals are supported by property taxes. Salem Memorial Hospital and Texas County Memorial Hospital are two supported by tax money. For Salem, this is about $650,000 a year from an approximately $0.25 per $100 of assessed valuation property tax. This is about 2% of the approximately $30 million budget SMH operates on each year. This can help make up the difference. Usually, tax supported institutions try to use the tax money for capital improvements (buildings, equipment, etc) instead of directly supporting operations (salaries, supplies, etc), but sometimes the tax money has to be used to make up the losses from operations. Under Missouri law, a hospital district may be supported by up to a $1.00 per $100 of assessed valuation property tax, if voters approve. District hospitals could ask the voters to pay more taxes to support operations, but this can be difficult. Property taxes are unpopular and citizens are feeling their own financial difficulties from the post-pandemic inflation being experienced across the country.
However, a community may feel it is important enough to have a local hospital to support the increased tax. Hospitals support hundreds of jobs and provide a necessary service in the area. The financial burden of the increased tax is most likely justified by the benefits. Whether this is true for Salem Memorial Hospital or Texas County Memorial Hospital, or others, remains to be seen.
One thing that is certain is that rural hospitals cannot continue this way indefinitely. Change is needed, or more hospitals will close. Hospital closures are devastating to the local economy and health of the citizens. In addition, it reduces tourism and new growth, as many people will not (or cannot, because of their health) consider moving or travelling to an area without an accessible hospital. Congressional action and/or local action will be needed to change the landscape and increase the sustainability for local hospitals across the country. Without it, poverty and health in rural Missouri will continue to get worse instead of better.
Congressional Representatives
The time is now to do something. Call Jason Smith, US Representative for Missouri district 8, or our two senators, Eric Schmitt and Josh Hawley. Ideally, the fixes would come from Medicare, but with the dysfunction in Washington, this may not be possible.
Local Option and Conclusion
As local community, we will have to consider if a further investment of our property taxes is warranted. A full $1 per $100 property tax for SMH would generate about $2.5 million, which would go a long way to covering a lot of the costs of vital services, like the ambulance, emergency department, and more. If that’s too much, then someday soon, if other factors don’t change, we will be faced with the reality of a Dent County with no ambulance, no emergency department, no laboratory, no CT scanner or MRI, no acute care floor, no long-term care unit, no clinic, etc., etc.
That doesn’t sound like a good vision of Dent County to me.
