Public option could endanger 1,000 rural hospitals: analysis

• As many as 55% of rural hospitals, or 1,037 hospitals across 46 states, would be at high risk of closure if a public option were implemented.
• The closures could cost 420,000 jobs.
• Rural hospitals not placed at high risk of closure may have to eliminate services and reduce clinical and administrative staff.

Creation of a public-option government insurance plan could endanger the solvency of more than 1,000 rural hospitals, according to a Navigant analysis.

The consultancy analyzed the financial impact of incorporating a government insurance program in the individual-insurance market, with providers paid at Medicare rates as is the case in the four leading legislative proposals. Some of the proposals offer the possibility that rates would increase under various scenarios.

The impact, according to the analysis, would place as many as 55% of rural hospitals, or 1,037 hospitals across 46 states, at high risk of closure. The rural hospitals at high risk represent more than 63,000 staffed beds and 420,000 employees, according to Navigant.

Additionally, rural hospitals not placed at high risk of closure could have to eliminate services and reduce clinical and administrative staff.

The negative outcomes were based on Navigant’s analysis of three possible scenarios under which the availability of a public insurance option would lead many to leave higher-paying commercial plans.

The range of outcomes included:

• A 2.3% revenue loss to rural hospitals if only the uninsured and current individual-market participants shift to the public option, with 28% of rural hospitals then at high risk of closure
• An 8% revenue decrease if employers shift 25% of covered workers from commercial coverage to a public option, placing 51% of rural hospitals at high risk of closure
• A 13.9% revenue decrease if employers shift 50% of covered employees to a public option, placing 55% of rural hospitals at high risk of closure

To prevent such financial consequences, the consultancy projected, Medicare would have to increase hospital payment rates under a public option by 40%-60%. That would cost between $4 billion and $25 billion annually, depending on the extent of the employer coverage shift.

The challenge facing hospital opposition to such plans was illustrated by a July Kaiser Family Foundation tracking poll, which found nearly two-thirds of the public (65%) favors a public option that “would compete with private health insurance plans and be available to all Americans.”

Just one more threat facing rural hospitals

A public option would significantly add to the financial challenges rural hospital have faced in recent years. Specifically, 108 rural hospitals have closed across 29 states since 2010, and Navigant found 21% of rural hospitals remain at high risk of closing unless their financial situations improve.

The negative financial performance of rural hospitals is partly driven by losses they incur on government-covered business. Excluding critical access hospitals, rural hospitals have an operating margin on Medicare patients of approximately negative 8.2%, which creates a dependence on commercial health plan patients and those with employer-sponsored insurance to make up the difference. 

The states where rural hospitals would face the biggest rates of revenue loss under all three scenarios are California and Pennsylvania, according to the analysis. Under the most adverse scenario analyzed, rural hospitals would lose nearly 20% of their revenue in California and 19.1% in Pennsylvania. 

Building on a previous analysis

The analysis followed a March report by Navigant on the financial impact of “Medicare for All” (single payer), a Medicare buy-in for those at least 55 years old and a public option that uses Medicare rates, using a hypothetical, $1.2 billion regional multihospital system as an example.

That study found significant financial harm to the hypothetical system from the Medicare public option, moving the system from a 2.3% operating margin to operating losses ranging from 3.9% to 8.4% of revenues.

Navigant noted that rural hospitals are much smaller than that hypothetical system and significantly more vulnerable from any reduction in revenues since they already have low volumes, little or no financial reserves and negligible shares of commercially insured patients.

The new report was funded by the Partnership for America’s Health Care Future, an alliance of health plans, providers and drugmakers.