In nearly every state in America, the sustainability of rural hospitals is a major concern. News of hospital closures, underserved populations and the disintegration of rural health-care networks has become an all-too-common theme across the nation.
Such incidences underscore the importance of rural hospitals to the communities they serve. In Kentucky, rural hospitals provide care to 45 percent of our population. They tend to be among the largest employers in their community, paying significantly higher wages than the local average.
In less than four years, Kentucky's rural hospitals have faced a difficult transition to a managed care system, dealt with costly technological advances and electronic health records requirements, Medicaid expansion, Medicare payment changes and the introduction of the Affordable Care Act. This period of historic transformation has occurred against the backdrop of significant economic difficulty felt most acutely in rural areas.
My office has undertaken an effort to assess the financial strength of our rural hospital network to fully understand the challenges these hospitals face in an era of unprecedented transformation.
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While it is clear that hospitals have experienced a cash infusion due to Medicaid expansion, what is not yet clear is the net effect to the bottom line. The actual net impact won't be known until audited 2014 financials are available later this year. Even then, rural hospitals have additional challenges to face in the coming years when the infusion of new dollars will be offset by the loss of Disproportionate Share Hospital payments.
The hope is to establish a baseline for critical analysis beyond the vagaries of rhetoric to provide policymakers and leaders with a sense of the actual financial condition of each of the 66 rural hospitals in the commonwealth. At the center of our efforts is the Financial Strength Index®, a proprietary tool to evaluate a hospital's financial health through four key metrics: profit margin, cash on hand, debt financing and depreciation.
The index reveals that 68 percent of our rural hospitals ranked below the national average in financial strength, with the bottom one-third scoring low enough to be considered in poor health. The hospitals in the most precarious position serve 250,000 patients, with the overwhelming majority on Medicare or Medicaid.
Let me be clear: Our work is not a rebuke of managed care, Medicaid expansion or the Affordable Care Act. The implementation of the ACA and the resulting coverage of 400,000 Kentuckians is historic, laudable and in the long-term best interest of improving conditions in a chronically unhealthy state.
What our work demonstrates is that our rural hospitals have to change business models to adapt to this environment. That task — and the implications for our rural populations — is too enormous for local, state and the federal government to expect these rural providers to manage successfully alone.
There are heartening examples of rural hospitals adopting innovation as the best approach for survival. From the efforts of Rockcastle Regional to become a niche provider of ventilator-dependent care to the coalition formed by St. Claire and Highlands Regional to provide administrative efficiencies and adapt to ACA changes, innovations are occurring.
The administration should adopt a similar assessment tool to monitor hospitals' financial strength. A workgroup of stakeholders, policymakers and providers should closely examine the results of enhanced monitoring and evaluate solutions such as mergers, affiliations, management agreements and other opportunities for innovation.
The Cabinet for Health and Family Services has an immediate opportunity to smooth the rougher edges of managed care in the current renegotiation of the contracts with managed care organizations. When the leaders of these organizations describe the existing contract under which they operate as "soft" and "loose," it is abundantly clear that the cabinet needs to exercise strong leadership to ensure a clearer, fairer and simpler system.
Through monitoring performance and by driving transformation and innovation, we have the opportunity to offer a Kentucky solution to the national problem of rural hospital sustainability.
The survival of our rural communities depends upon it.