Financially distressed rural hospitals in four states

The Balanced Budget Act of 1997 dramatically changed the payment environment for institutional providers of non-acute health services by mandating a shift in Medicare reimbursement of outpatient, home health, and skilled nursing services from the traditional cost-based approaches to prospective payment. Although they were designed to slow health care spending, these Medicare payment reforms, particularly the outpatient prospective payment system (OPPS) rules, were projected to have a disproportionately negative impact on many rural hospitals. Subsequent revisions to the Balanced Budget Act (BBA) modified the initial legislation to alleviate or postpone the negative financial impact, including a hold harmless provision for small (100-bed or under) rural hospitals. Due to delays in processing hospital cost reports, sufficient data to assess the impact of the new outpatient payment system on small rural hospitals have only recently become available. We simulated the effect of OPPS on the financial performance of rural hospitals in four states - Iowa, Texas, Washington, and West Virginia. Our findings suggest that the profitability and cash position of small, government-owned, and Medicare-dependent hospitals will be adversely impacted by outpatient PPS. The results also suggest that the number of financially distressed rural hospitals will increase significantly. The small rural hospitals currently protected by the hold harmless provision are those that are likely to be hardest hit by OPPS.