The Failure of Rural Healthcare: A Symptom of More to Come

Modern Healthcare

Modern Healthcare

Rural healthcare systems are struggling to remain financially solvent, and patients are paying the price. This Modern Healthcare article inspired by a team at Navigant, “Nearly a quarter of rural hospitals are on the brink of closure” clearly outlines some of the challenges facing these incumbent provider systems. The authors also recommend some admirable incremental improvements to policy that could help revitalize this market.

Unfortunately, while these recommendations are a step in the right direction, they will not be nearly enough to address these failures. While rural communities face some unique challenges not present in urban environments, I believe that the overarching issue is the same across America: healthcare is provided to patients in a sub-optimal business model for high quality, cost-effective treatment.

Industry Structure as the Root Cause

The issues of provider industry structure are exacerbated by the smaller populations in rural communities. To take it to the next level of detail, here are the biggest challenges for providers in these environments:

  • Large hospitals have significant excess capacity (read: huge fixed costs) for which they must charge high prices to break even

  • Specialist physicians are lured to communities that do not have the demand needed to satisfy supply of medical services

  • A shortage of Primary Care Physicians (25% fewer in rural areas) leads to lacking management and coordination of care for patients

  • Fee for service medicine incentivizes service volume over health management, driving institutions to pursue demand growth where little exists

While this list is not exhaustive, the main takeaway is the following: Volume-based business models of rural hospitals will not provide the best quality, affordable care that patients need. We need to reform the system, not individual businesses.

If this is the case, how do we move forward?

A Model for Rural Healthcare

Whenever I try to formulate even a high level vision of a high-functioning provider system, I always go back to Clayton Christensen’s book, The Innovator’s Prescription. Those who are familiar with this work will see similarities in what I am proposing below. If you haven’t read it, please do.

Here is a little diagram to get us started:

With 62M Americans living in frontier or rural communities (source), the challenges of rural healthcare impact about 15% of the US population. This is equivalent to the number of people on Medicare - a certainly non-trivial number. While things like high uninsured rates, long travel distances, and limited access to specific community support are definitely unique to rural regions, I believe all of these things could be addressed by the high-level model I proposed. Here is a breakdown of key components:

Virtual Primary Care

Given the reduced availability of Primary Care Physicians, I would love if we could incentivize more doctors to move into rural communities. However, I do not think this is likely and the financial incentives required to do so would like cause undue financial burden on the population.

Instead, let’s use recent innovations in technology to provide everyone with a Virtual Primary Care Physician (and team). Companies like Sherpaa have already demonstrated how this model could work. Additionally, I believe that these V-PCPs should be compensated on a capitated basis in order to incentivize better coordination. Given the distances that people in rural communities need to travel for care, it is incredibly important that they have support in managing when, where, and how they receive their treatment.

Focused Outpatient Services

These outpatient services are best represented by the “focused factory” model proposed by Christensen is his book. Compensated based on quality of outcomes, a limited set of services would be provided in high volumes to the community. Things like LASIK surgery, hip or knee replacements, and dental surgery are all examples of services that would be well-served by this model.

Note that only those services that have adequate demand in the geographic region should have dedicated facilities, all other treatment should be referred to a more populous area. This will differ across each rural town.

Emergency Services

With an average daily census of about 7 patients (despite an average capacity of 50 beds), it is no wonder that limited demand is financially destroying rural hospitals. Instead, we need to shrink these facilities to focus on only the emergency services needed within the community, rather than implementing full-scale health systems where populations are tiny.

This can be accomplished through transfer agreements with the larger health systems that are closest to the community. The rural hospital should stabilize patients in emergency situations, and then transfer them as needed for more complex care. There is no need for anything beyond a Level III trauma center, and Level IV or Level V centers may suffice for this purpose. No other care beyond emergency treatment should be administered in these naturally high cost facilities.

Reformed Insurance Models

This alteration of the provider industry structure also necessitates payment reform in order to remain sustainable. On the reimbursement side, Emergency Services would be the only component of treatment paid on a fee for service basis. Outpatient facilities would receive bundled payments for the treatments they provide, and primary care would be fully capitated so as to incentivize coordination. These reforms should also result in significant cost containment, leading to the ability to charge lower premiums and which decrease the uninsured rate.

On the benefits side, insurers should also consider the unique elements of the rural community. In particular, benefits for travel and missed work should be at the forefront. The model recommended above assumes that people can afford to travel long distances in order to receive treatment for more complex issues. Given the reduced costs associated with local providers, I posit that insurers should have more than enough room to cover things like airfare, taxis, car rentals, etc. in order to enable patients to visit facilities outside their geography.

Community Programs

As with any community, we cannot ignore the impacts the Social Determinants of Health have on the population. With far higher mortality rates from diseases like lung cancer and cardiovascular issues, rural communities would likely achieve outsized improvements as a result of these programs.

Given the incentives of PCPs and Payers in the region, I believe they would be most apt to establish SDoH programs (food pantries, smoking cessation, community centers, etc.). The benefits to public health would return to these businesses in the form of reduced costs and greater profits. Everyone wins. (I know this is oversimplified - but here is a closer look at some of the benefits of SDoH and how it could be implemented).

Challenges to Implementation

While this vision may make me seem like an optimist, here is the other side of the coin. Achieving this vision is really, really difficult because of the following:

  1. Employment: Hospitals are major sources of employment in rural communities. Shrinking them will result in many lost jobs that will need to be reallocated elsewhere. If the other forms of care mentioned in this article cannot absorb these employment losses, the economic impact could be significant.  

  2. Incumbent Incentives: There is no provider executive in the world that would recommend shrinking their institution and reducing the services provided. End of statement.

  3. Confounding Economic Factors: There are confounding economic factors contributing to SDoH issues. Behavioral health diseases, joblessness, and lack of insurance are all problems that adversely affect these communities. Reforming the provider model will not address the root of many of these problems.

  4. Pass Through Savings: Lower costs to insurers would likely not be passed down to patients in the form of lower premiums. Instead, they would go to the insurer’s bottom line. However, it is more likely that these lower costs will reduce growth of premiums over time - which is at least something.

  5. Travel + Coordination: Supporting travel and coordination may be more difficult than planned. While I would love to think that hopping on a plane to Cleveland Clinic is possible for everyone in these communities, that may not be the case. For these individuals with high healthcare needs, living in a rural community just might not be a tenable scenario.