Decision Day: Pursuing Medicare Rural Emergency Hospital Designation

The Rural Emergency Hospital program is in the news.

A recent New York Times article, A Rural Hospital’s Excruciating Choice: $3.2 Million a Year or Inpatient Care, discusses a small rural hospital in Idaho. Like more than 1,700 rural hospitals, Idaho’s Cascade Medical Center has been invited to become a federally designated rural emergency hospital, which “would inject monthly payments amounting to more than $3 million a year.”

In addition, on November 1, 2022, Centers for Medicare and Medicaid Services (CMS) published the annual Outpatient Prospective Payment System (OPPS) rule. Proposed implementing conditions of participation, reimbursement, enrollment and other implementing regulations were finalized within the OPPS final rule.

It’s a tempting choice.

As one who has spent 30+ years advising hospitals and helping obtain all Medicare reimbursement they are legally entitled to under the Medicare reimbursement regulations, my assessment of the new program leads me to conclude there are some distinct advantages:

  • Medical care continues to evolve towards outpatient settings.
  • The subsidy provides a stable revenue stream.
  • The program helps to maintain emergency care and acts as an entry point in rural communities.
  • Program participants can have robust lab, diagnostics and outpatient surgical services.
  • Medicare reimbursement is higher than physician fee schedules and is five percent higher than OPPS.
  • For communities serviced by critical access hospitals, Medicare beneficiary coinsurance will be significantly less.

There also are tradeoffs.

The loss of inpatient services since rural emergency hospitals (REHs) must maintain an average length of stay of less than 24 hours will cause community relations issues. Financially REHs will not have a Medicare swing bed program which is a large financial contributor to CAHs. As such, smaller CAHs with robust swing bed programs will lose a large funding source.

There will be an application process to become a rural emergency hospital. The University of North Carolina Cecil G. Sheps Center for Health Services Reimbursement predicts 68 hospitals nationwide will convert to the Rural Emergency Hospital designation. The 2021 report expects “hospitals with negative operating margins and low patient count” are most likely to convert. “The states with the greatest number of hospitals expected to convert are Texas, Nebraska and Oklahoma.”

CMS, on the other hand, stated in the Medicare Outpatient Prospective Payment System final rule that they are only estimating 35 hospitals to convert to REH in the forthcoming years

Rural Emergency Hospital: Making the Calculation

Each critical access hospital and rural hospital with less than 50 beds will need to determine the financial feasibility of converting to REHs before deciding whether to apply to the new program.

I am advising hospitals to calculate the inpatient revenue loss from Medicare and other insurers and then compare that number to:

  • The federal subsidy of $3.2 million annually and
  • The expected cost savings from the elimination of inpatient services. REH will be able to reduce costs due to reduced nursing staff, ability to staff emergency rooms with qualified clinicians versus emergency medicine physicians, a smaller plant footprint and overall reduction in general service department costs such as dietary, plant operations and administrative services.

Existing service lines critical to rural communities’ health care delivery systems such as ambulance service, Medicare rural health clinics, home health agency and hospice programs can continue to render services. Unfortunately, the Consolidated Appropriation Act did not address funding shortfalls for these other critical services.

The subsidy is the average reimbursement benefit that critical access hospitals received under the cost-based reimbursement system in 2019. Intuitively, it is possible that struggling rural hospitals still subject to the Medicare Inpatient and Outpatient Prospective Payment Systems may benefit financially, more so than CAHs.

More importantly, hospitals will and should try to calculate how the loss of inpatient services will impact their patients and community. As the CEO of Iowa’s Crawford County Memorial Erin Muck shared,

“Inpatient services make up just about 10 percent of all the hospital’s services, but they’re important to residents.

’Let’s say, I’m an 80-year-old lady and I have pneumonia, and I require hospitalization. I would have to go to a hospital further away just to be hospitalized for my pneumonia. Anybody receiving surgery that could possibly be more than an overnight stay would have to have that surgery at another organization.’”

REHs are not the end-all solution to the financial challenges facing rural hospitals. It is, however, a first step by Congress. Enhancement to the program, such as limited inpatient services, cost-based reimbursement for skilled nursing facility services, rural hospital-based ambulance services reimbursement and other enhancements to Medicare reimbursements could make REHs more beneficial to rural community health care delivery systems.

The application, in addition to making a commitment to maintain and operate an emergency department and outpatient observation, is expected to require an action plan detailing services to be provided and services to be eliminated, a strategic plan and information about other services the hospital expects to have, e.g., ambulance, telehealth, population and health equity outreach plans. Hospitals will need to maintain core outpatient services, including:

  • Emergency room and observation
  • Laboratory: Available 24/7 for immediate diagnosis and treatment of patients
  • Diagnostic and therapeutic radiologic services
  • Pharmaceutical services that meet the needs of patients and the community and has qualified pharmacist or other qualified personnel in accordance with the state scope of practice law

For more information, I encourage you to visit:

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Scott Cooper


Scott brings more than 15 years of experience in revenue cycle management to Ovation Healthcare. His career began at companies athenahealth and Nexus Healthcare Solutions where he focused on building tech-enabled revenue cycle services coupled with offshore capabilities to help business find opportunities at scale. At McKinsey & Company, he advised national health systems and RCM service providers on large-scale, operational transformations and performance programs focused on yield improvement and cost reduction. Most recently at Tegria, he led all revenue cycle services, transformation, and integration across the enterprise.