Research Report
Assuring Access: Examining the Economic Impact of Rural Hospital Legislation

By Liz Warren-Pederson

Associate professor of economics and Eller College Fellow Gautam Gowrisankaran and three co-investigators have received a $500,000 Agency for Healthcare Research and Quality grant to determine the impact of the Rural Hospital Flexibility Program (Flex) on hospital care for rural residents.

Congress established Flex in 1997 in response to growing concern about rural Americans’ access to health care. Now Congress is revisiting the program. “The analysis we propose should provide policymakers with important information to formulate an overall assessment of the program and guide potential changes to improve its efficacy,” principal investigator Gowrisankaran said.

When the legislation passed in the late 1990s, he said, “There was significant concern about rural hospitals closing. The legislation ensured that people in rural areas have access to hospitals. One way it did so was to allow rural hospitals to convert to Critical Access Hospital status.”

Critical Access Hospitals (CAH) receive more generous inpatient and outpatient cost-based reimbursements from Medicare. In order to qualify for CAH status, hospitals must have fewer than 25 beds, limit inpatient stays to four days, and link with other institutions to foster quality improvements.

In the years since the program was established, over 1,300 rural hospitals, representing more than 25 percent of all U.S. hospitals, have converted to CAH status. In 1997, 15 percent of rural hospitals had 25 beds or less; by 2004, that number had risen to 45 percent.

“The unexpected result of the legislation was that hospitals were incentivized to reduce bed capacity,” Gowrisankaran pointed out. “Were the extra beds hospitals eliminated to qualify as a CAH wasted capacity, or could there be a negative effect on hospital service offerings?”

The Flex program is also costly. “Government estimates predicted that CAH hospitals would have received $5 billion in cost reimbursements in 2006, $1.3 billion more than their revenues under the Prospective Payment System (PPS),” said Gowrisankaran. Under PPS, hospitals are paid a predetermined rate for each Medicare admission.

“As a result of the increase in federal reimbursements received by CAH hospitals, the Flex program maintained rural residents’ access to hospital care by forestalling closure and improved the quality of rural hospitals,” Gowrisankaran said. “However, the program’s restrictions also dramatically reduced the average hospital size and may have affected their service offerings. This implies that CAHs may have a reduced ability to achieve scale economies, and so CAH conversion may reduce the value that patients receive.”

Gowrisankaran, along with Claudio Lucarelli (assistant professor of policy analysis and management at Cornell University), Robert Town (associate professor of health policy and management at the University of Minnesota), and Ira Moscovice (Mayo Professor and division head of the Division of Health Policy and Management at the University of Minnesota) will assess five aspects of the Flex program over the next two years.

“We want to understand how conversion to CAH status has affected the demand for hospital services for patients with different types of conditions,” he said. “We will also assess how CAH status has affected the quality of hospital care for rural residents with different diagnoses, measure the extent to which CAH hospitals are capacity constrained, evaluate how the Flex program has affected the welfare and location of the inpatient care of rural residents, and consider how alternate policies, such as different bed size limits and lump-sum transfers, could affect the care for rural residents.”

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