Why America’s Rural Hospitals Suffer under Shared Risk and Full-Risk Payer Contracts

In managed care agreements, payers regard rural and urban hospitals as “hospitals”, all uniform in character. But in reality, huge variations in the demography, economics, culture, and environmental characteristics of different rural places make them very different from their urban counterparts and distinctly different from their other rural competitors.

Large rural and suburban bedroom communities and towns located proximate to larger metropolitan areas often have more in common with metropolitan areas than they do with remote and isolated small towns. When payers assume that they can contract with hospitals and healthcare providers and clinics similarly, health plans often fail to identify each site’s distinct health care concerns and effective methods for resolving those problems. Doing so increases risk to the provider in ways not accounted for in their standard managed care full-risk and shared-risk agreements.

One case in point is access to medical specialists and surgical services. The absence of certain services in a small town is expected. All along the Wasatch range here in Utah, for example, shortages of health services, specialists, technology, and Centers of Excellence, mean that people travel (medicaltravel, healthtravel, medicaltourism, dentaltourism, healthtourism) and tend to remain overnight at the consultation, treatment or diagnostic location overnight which disproportionately adds to their out-of-pocket, unreimbursed costs to access care when a drive of >3 hours in one direction is required.

  • A very small population base may only support 1 or 2 generalist physicians and a nurse practitioner or physician assistant. These practices are fundamental to the care and healthcare wellness of the community. Loss of any of them due to retirement, bankruptcy, or closure for any other reason causes a huge impact on the remaining (if any) practices, on health access, and chronic disease management of the community.
  • A larger rural town, whose geographic service area may include the small town, may serve as a regional center for accessing specialists and surgeons.
  • Health planning, recruitment and retention, wages and salaries, and the ability to recruit highly-trained, niche-specialized, knowledge workers to manage revenue cycle, contracting and negotiating with health plans are more challenging to recruit because the salaries demanded are out of line for the rest of the jobs in the community.

For example in New York City, someone with the managed care skills needed to negotiate a full- or shared-risk inpatient contract between a health plan and a hospital or health system is often paid between $130K and $180K plus bonuses. That’s impossible to match at a hospital that is running on a base of $15 million per year.

But when the payers offer the same contracts and rates to the rural hospital in upstate New York, capitated contracts with a total of 20,000 local and surrounding area lives on the books, if the hospital tries to match that salary to attract and retain a knowledge worker, $0.75 PMPM/PBPM is required just to cover the salary of that managed care negotiator, without bonuses and other employment-related costs. And that’s only the one person. What about that individual’s supervisors and supporting workers? What portion of the capitation payment will be required to cover their wages and benefits and employment costs to maintain the ability to contract under a capitation agreement? What’s left to cover the cost of care and margins to sustain operations and growth or derive profit?

And what if the rural town is in a depopulation phase where more people are leaving to live and work someplace else and are not being replaced by new residents? And what if the town is growing so fast that it cannot keep up and patient access begins to erode and the medical community cannot meet the NCQA-stipulated access to care standards that are often referred and incorporated by reference into the contracts?

When I asked this a few months ago, someone responded, “Well, I guess we could implement telehealth and telemedicine.” Sure, but if telehealth and telemedicine are not included in the rate cell calculations for the capitation payment, there’s no money allocated for those costs in the rate offer. And if there’s no telehealth or telemedicine platform available, where does the capital come from to build one and staff one? And if the hospital or health system in question doesn’t own it, it must pay retail for someone else to build and staff it, and insure it, and pay for the wages, technology, and running costs wherever it happens to be located.

Rural health is different

On average, rural populations have relatively more elderly people and children, higher unemployment and underemployment rates, and lower population density with higher percentages of poor, uninsured, and underinsured residents.

Rural populations are more vulnerable than their urban counterparts to economic downturns because of their concentrated economic specialization.

As I mentioned above, longer travel distances to—and higher costs associated with—needed health care services mean domestic medical travel/ domestic medical tourism

It also means:

  • higher delivery and shipping costs for supplies and purchasing in smaller quantities which leads to diseconomies of scale;
  • high rates of fixed overhead per-patient revenue;
  • fewer health care providers and a greater emphasis on generalists;
  • health care facilities with limited scopes of service and limited technologies;
  • economically fragile hospitals with high closure rates;
  • greater dependency on Medicare and Medicaid reimbursement;
  • higher rates of chronic diseases; and
  • different clinical practice behaviors, practice arrangements, and reimbursement levels.

Residents of counties with larger numbers of workers who commute out of the county and who travel more than 30 minutes each way to reach their care providers received substantially lower levels of health resources. Access to proximate services for care often makes the difference between life and death.

Back in 1991, when I was injured in rural Texas while driving from Florida to Denver for relocation, I stopped in at the first “H” sign on the road to be diagnosed. To shoot an x-ray of my shoulder required an almost 90-minute wait, as they called the tech to come back to work at 7pm. She resided 43 miles away and was cooking dinner for her family. There was no radiologist on duty at that hour. I occupied a bay in their 5-bay ED for nearly 4 hours to be examined, x-rayed and put in a sling and discharged. The reimbursement divided by the hour was less than it cost to sustain the bay itself. In the ED, one doesn’t think along those lines unless one has been an administrator and had to try to figure out how to meet the cost of care per hour and the cost to simply “exist” as a hospital, per hour. Then, your perspective as you watch and wait, in pain, over the four hours is very different from the patient in the next bay. You either react with more gratitude that they are there, or you get really angry at the way things are running.

So, unless the payer supplies demographics of its distinct member population by at least age, gender, zip code and dominant diagnoses from a predictive modeling output report, identifying and optimizing the supply and mix of providers are going to be different and challenging for each contracted provider.

The contractor must know the environment of care as well. You cannot simply plunk a contract analyst and negotiator from the big city who knows nothing of the rural setting to negotiate those full- and shared-risk contracts. The environment in which rural physicians and other providers practice differs greatly both across rural areas and between rural and urban areas. The more isolated the community, the more likely it is that physicians must widen their scope of practice to include services and depart significantly from the actuarial assumptions of what is carried out in primary care and what specialists handle.

Physicians who practice in smaller and more remote rural towns practice in a medical care delivery system characterized by financially vulnerable practices. This is further exacerbated by:

  • smaller populations with higher percentages of sicker, poorer, and more elderly patients
  • “food deserts” and significant challenges to access healthful fresh foods and organic products
  • water quality challenges
  • longer distances to specialists and tertiary hospitals
  • longer practice hours
  • the absence of local collegial support
  • limited access to advanced technologies
  • relatively high fixed costs per delivered service
  • challenges to patient privacy (where everyone knows everyone’s business)
  • clinical adaptations in the absence of nearby specialists
  • generalist scarcities
  • the requirements to comply with documentation of quality assurance programs
  • compliance with the HIPAA regulations, and
  • costs to attend continuing medical education—are different from those of their large city contemporaries, differences that have a potential impact on health outcomes

But these items on the bullet-point list must be KNOWN by the contractor. The contractor cannot have them on a meaningless, unsubstantiated checklist of “stuff to keep in mind”. The actual knowledge of what is happening at a granular level is the only way to model risk impact of a full- or shared-risk agreement – capitated or paid by another method – along with the demographics and current health status and social determinants of health, before one should attempt to analyze and negotiate these contracts with payers and then agree or walk away.

The thing is, if your hospital is the only hospital in the service area, and you decline the risk assumption overtures from a payer because they are not mutually fair and beneficial to your organization, where else are they going to shop? So simply because that’s what they offered doesn’t mean you must accept it. There is no fait accompli, no matter how intimidating the provider relations representative may act.

But wait…. there’s more.

Recent talks from Centers for Medicare & Medicaid Services Administrator Seema Verma seem to indicate that while the Trump administration has focused on voluntary payment models, that is likely to change. Verma said launching mandatory payment models is crucial to avoid selection effects that can skew data on how well they’re working. But if they transfer this risk to Medicare Advantage plans and the MA plans use a one-size-fits-all contract for urban and rural hospitals and health systems that employ PCPs, how might that play out?

It’s time to start weighing alternative strategies and tactics and reading between the lines. I say this because that’s how I interpret the risk associated with CMS’ preparation for mandatory capitation when I read Verma’s statement that, “Requiring participation also helps us understand the impact of our models on a variety of provider types, so the data resulting from the model will be more broadly representative.”

Can you spell Guinea Pig? Ugh. Would you like a side order of reinsurance premium allowance to go with that? She also said something troubling that, to me, indicates that they plan to move quickly without adequate study on the breakdown of urban vs rural in its many forms described above: She said she’s “not here to protect the status quo,” but value-based payments and similar changes are more effective ways to address issues within healthcare. More effective. Hmm, for all or for CMS and the MA subcontractors.

If I were a subcontractor MA plan hearing this, I wouldn’t accept this arrangement with CMS without knowing for sure that the providers would accept these terms. I would want to have, in hand, a well-drafted, binding Letter of Intent from the hospitals and health systems to whom I would transfer or share risk at any level, complete with all the conditional stipulations that would make the letter “binding”. And if I couldn’t get that from the providers, in advance, I’d likely tell Ms Verma, “Good luck with that, you are on your own. Show us how its done, first. Prove your concept, prove it works and then we’ll reconsider.”

Where to get help if you need it

Are you associated with a rural health provider facing shared- and full-risk contract offers? Do you have the knowledge workers on your internal team? If not, are you missing a coach or an interim analyst and negotiator. I can help, but I don’t have time to cold call and I’ve never done so in my entire career. I’m not about to start now. If you need help, please feel free to call me at (800) 727.4160 or email me for an appointment for brief introductory chat at no cost or obligation.

But just remember one thing: I can’t help everyone who calls. If your near-market competitor has already contracted with me to help them, I may not be able to help you if working for both of you can give rise to conflicts in terms of antitrust risk. To determine this, my conflict checking includes checking for hospitals and providers of similar services within not only the Standard Metropolitan Statistical Area, but also the areas defined within “health care commuting areas” in order to maintain the spirit of competition. So don’t wait and then find you’ve been shut out. I tend to wait as much as 3-6 months between projects for competitors. And I won’t be able to assign you to another consultant within my firm under my oversight. That doesn’t work where antitrust risk is concerned. So make your call today if you need my help.

Payer Contracting

If you just need to learn the basics of capitation and shared- or full-risk contracting, the least expensive way to do that on your own is to search the Internet for my more recent articles by using your favorite search engine to search for Maria Todd or AskMariaTodd™ and capitation or “managed care contracting” or “risk contracting managed care + Maria Todd or AskMariaTodd™, and you may also refer to my Managed Care Contracting Handbook, 2nd edition, which is available digital or printed from any retail bookseller or from the publisher. (I’m not permitted to sell them under my international publishing contract with CRC Press).


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