FRANKFORT — A third of Kentucky's rural hospitals are in poor financial health, raising questions on whether some can survive, according to a report released Monday.
The report also said the number of health care providers in the state dropped between 2013 and 2014, with the steepest declines in rural Eastern and Western Kentucky, according to the report from Auditor Adam Edelen.
The findings cause concern about adequate access to care at a time when hundreds of thousands more Kentuckians newly covered under Medicaid need services, according to the report.
"If we don't make sure our provider network, particularly a network that is built around rural hospitals, is solvent, it really means that that insurance card doesn't mean much when you don't have people there to provide that care," Edelen said at a news conference.
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Gov. Steve Beshear said that the report did not reflect more than $506 million in additional Medicaid payments to Kentucky hospitals in 2014 or reductions in the amount of unpaid care they had to absorb.
"Those are huge changes to hospitals' bottom lines that are not shown here," Beshear said in a release.
The report from Edelen's office acknowledged the increased Medicaid payments, but said revenue is only part of the picture. Because of higher costs to provide care and other factors, the net effect on hospitals' bottom line won't be known until audited financial information for 2014 becomes available later this year, the report said.
Edelen said the goal of the review was to get a baseline picture of rural hospitals' financial condition — which will help track their health in coming years — and make recommendations on how to help them adapt and remain viable.
The report said rural hospitals play a critical role in Kentucky, providing health care to 45 percent of state residents — including a high share of low-income and elderly people — and bringing important economic benefits.
Hospitals already have faced wrenching changes, the report said, including the state's switch to managed care under Medicaid, the expansion of the program for poor and disabled people, and the start of the federal Affordable Care Act, commonly called Obamacare.
And more change is on the way, including cuts in federal reimbursement for hospitals that serve high numbers of poor people.
Edelen's office analyzed factors such as hospitals' debt financing, cash reserves and the amount of revenue they keep as profit.
The review included information from 52 of the state's 66 rural hospitals from 2011 through 2013. A number of private, for-profit hospitals did not provide information.
The review showed that the financial condition of 68 percent of Kentucky's rural hospitals was below the national average, with one-third considered in poor financial health, the report said.
Edelen said it's possible some of the dozen-plus hospitals judged to be in poor condition could close.
Some of the hospitals had only a few days of cash reserves on hand to cover operations.
Edelen said one key reason for financial problems at rural hospitals is tough economic conditions in their service areas, which has eroded private insurance coverage that reimburses providers at higher rates than publicly funded insurance.
The report said the decision to expand Medicaid has meant a "large infusion" of new money for rural hospitals, but that there also have been added costs.
Rules and record-keeping required under Medicaid managed care have added an average of $157,000 annually in administrative costs at rural hospitals that provided information, for instance, auditors found.
One problem is that hospitals have to deal with different rules and paperwork for each of the five Medicaid managed-care companies, the report said.
Edelen said some hospitals face the unacceptable prospect of laying off workers responsible for patient care in order to hire people to fill out forms.
Edelen aid the report was not a rebuke of Medicaid expansion, managed care or the state's kynect insurance marketplace.
The overall effect of the changes has been positive, creating a net increase in jobs and accomplishing the laudable goal of extending healthcare coverage to almost 400,000 Kentuckians, he said.
The Cabinet for Health and Family Services has much to be proud of in managing the massive effort to improve the state's terrible health outcomes, Edelen said.
But he said there has been good and bad for hospitals, and policymakers need to understand what's happening on both sides of the ledger, and at different facilities.
The review showed that rural hospitals owned by, or affiliated with, larger provider organizations scored better in the measure of financial health. One reason is better ability to consolidate administrative costs.
In contrast, the analysis showed some hospitals in small, relatively isolated communities such as Wayne and Clinton counties were considered in poor financial condition, the report said.
The report recommended that rural hospitals examine potential changes such as alliances with other facilities and management contracts.
The report also pointed to the example of Rockcastle Regional Hospital in Mount Vernon, which is in a small town but has set itself apart as a specialty center for patients dependent on ventilator care, such as those with spinal-cord injuries. The hospital was judged in good financial shape.
Edelen said government needs to help hospitals with new ways of doing business. The Cabinet for Health and Family Services is reviewing its approaches to make sure it can foster innovation, he said.
However, he said the cabinet is not properly monitoring the decline in healthcare providers.
The report said the total number of providers in Kentucky — everything from doctors to hospice workers — went down by 5,852 from 2011 to 2014, or 15 percent.
There was a drop in numbers in 36 of the 65 provider types, the auditor's report said.
In contrast, the cabinet's response said the number of providers who billed Medicaid for treating people increased by 8,518 overall, or 44 percent.
The report from Edelen's office said using the figure on the number of providers receiving payments was misleading "given the known workforce shortage."
But cabinet officials believe the number of providers submitting bills "is more indicative of health services delivered to Medicaid recipients" than the total number of providers enrolled in the system, said cabinet spokeswoman Jill Midkiff.
She said the numbers in the report and from the cabinet are both accurate, but show different things.
Michael Rust, president of the Kentucky Hospital Association, said Edelen's office did a good, balanced review.
The association has heard anecdotally about issues with access to care in some places, as well as information on the number of providers going down, he said.
The special report included a number of recommendations, including stronger penalties for contract violations by Medicaid managed-care providers; improved opportunities for the cabinet to monitor managed-care quality and program requirements; creation of a single, streamlined procedure for providers to get approved by Medicaid managed-care companies; an analysis of whether current rules give hospitals enough flexibility to make changes such as dropping costly in-patient beds; a better system to recruit providers; and a group to study new ways to provide health care in rural areas in order to maintain good quality and access.
The report also recommended that the cabinet begin monitoring the financial health of rural hospitals.
Edelen said he would urge all the candidates for governor to commit to tracking the financial condition of rural hospitals. If they don't, the auditor's office will continue doing so during his term, Edelen said.
State Agriculture Commissioner James Comer, a Republican candidate for governor, endorsed the findings of the report and said if elected he would act on many of the recommendations, including monitoring hospitals' financial condition and looking at news ways to provide services in rural areas.
Beshear and the cabinet said the state has worked with hospitals for years to deal with the challenges they face and develop new strategies to deliver services, and that that effort continues.
The state got a $2 million federal grant last year to study innovative payment and service approaches and has five work groups — which include hospitals — studying issues such as how to improve delivery of health services, according to Beshear and the cabinet.