Healthcare News & Insights

Strategies to save the small, rural hospital

ThinkstockPhotos-100479352Community hospitals, central to small-town health care and local economies, are closing at a rapid-fire pace. The Rural Health Research Gateway found that from 2010 to 2014, 47 rural hospitals ceased providing inpatient services. And currently, 673 rural U.S. hospitals are at-risk for closure, according to iVantageINDEX. But while the regulatory climate may feel daunting to the lone community hospital, it doesn’t have to be. In this guest post, Timothy Gar, CEO of a comprehensive healthcare consulting firm, shows struggling providers strategies they can use to become financially solvent and sustained. 


The evolution of the American healthcare system hasn’t benefitted independent, small rural providers. These hospitals typically serve older, poorer populations, making them more reliant on Medicare and Medicaid reimbursements – funds the federal government slashed under the Affordable Care Act.

Under the current system, large healthcare systems with the resources to drive widespread efficiency and technology adoption are at an advantage.

Audit and align

One of the smartest strategies small hospitals can use is a 360-degree financial analysis, with at least five years’ worth of data. It’s best to get a third-party to review the information to objectively tell the financial story and identify underlying operational trends that might undermine long-term sustainability. Any initial red flags will help get to the root of the issues crumbling the hospital’s financial foundation.

Often, these financial audits reveal outdated systems still in use, which can be a death sentence for small, independent hospitals. For example, an audit for a rural hospital revealed that the average length of stay for behavioral health patients was 16.5 days, when three to five days is typical for a medically-safe discharge. Looking closer, it was discovered the hospital was still operating under a per diem model, even though payers had moved to a diagnostic related group (DRG) model several years before. So, the hospital was getting reimbursed the same amount of money for three-day stays as it was for 20-day stays. In that case, shifting care and operations to reflect a DRG model resulted in a savings of $650,000 annually.

Billing and purchasing should also be carefully audited. By examining billing charts and tracking how patient loads correlate to revenue, small hospitals can ensure they have an up-to-date understanding of what they’re billing and buying – and how they’re doing it.

For instance, group purchasing organizations (GPOs) are often an excellent cost-saving tactic. However, the GPO that saves 15% today might only save 2% the following year. GPO agreements should be revisited frequently and at least once every year.

Know your options

These at-risk hospitals often have serious debts to settle, as well as important decisions to make about how to handle them. Here are four ways in which small, independent hospitals can address debt:

  • Judicial reorganization. This is bankruptcy handled through the court, and it does come with some risk. These reorganizations can trigger default on bonds, making them due immediately. And, depending on contracts, bankruptcy can also result in the loss of revenue streams from CMS or other payors.
  • Refinance debt structure. Refinancing hospital debt can be an option if interest rates drop or a hospital’s credit quality improves. However, it may not be advantageous to do so depending on the terms of the Master Indenture agreement or those of the bonds themselves.
  • Non-judicial reorganization. Here hospitals restructure their debt and rework payment plans with debtors outside of court. The new plans can help secure discounts and provide additional time for organizations to pay back debts without filing for bankruptcy.
  • Putting a hospital on the market is an attractive option to many struggling hospitals, but it can also be a tough sell. Larger systems often naturally absorb the patient flow from a closed hospital without purchasing the facility itself.

Knowing which option is appropriate for an individual hospital can depend on a number of factors, including the specific terms of the financing the facility has in place, and even geography. For example, there’s an automatic stay in the bankruptcy process that keeps insurance companies from terminating agreements – with the exception of Medicare and Medicaid. So, CMS can decide on a facility-by-facility basis whether it wants to continue to keep the facility in network.

Generate new revenue

Rural healthcare providers can’t simply cut or refinance their way to prosperity. For a small hospital to become financially sustainable, it must develop new revenue sources.

One way to do this is for hospitals to team up with outpatient healthcare providers to tap into a new revenue stream, outside of inpatient care. A hospital can simply make its facility available to the group and set up a revenue sharing program. As Medicare and Medicaid are now paying for behavioral health services, hospitals are developing additional behavioral health programs in order to generate new revenues and provide valuable services in their communities.

Whatever the program, new services supplement the core of the business and demonstrate relevancy in the community and the marketplace.

As is true with any business, small, rural hospitals cannot live – let alone thrive – on uncompensated services. They must devote themselves to superior financial health in order to survive and serve their communities. With the right strategies, even organizations teetering on the brink of bankruptcy or closure can change their course and keep their independent roots firmly planted in the community.

Timothy Gary is CEO of DW Franklin Consulting Group, a Nashville, TN-based, full-service healthcare firm providing consulting services in the areas of government relations, general business guidance and legal strategy. Mr. Gary is also an attorney with Dickinson Wright PLLC.

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