5
Finance

SUMMARY

The Quality Chasm report calls for the implementation of payment systems that encourage the delivery of quality health care. This chapter begins by addressing how pay-for-performance initiatives should be implemented in rural communities. The committee recommends that rural demonstration projects be carried out to test different approaches to pay-for-performance systems in rural areas.

To establish the right environment for the implementation of pay-for-performance initiatives, financial stability for rural health care delivery systems is required. Such stability is also required to finance investments in human resource networks and information and communications technology. Many rural health care delivery systems have been financially unstable. The chapter addresses the significant policy steps, most recently the Medicare Modernization Act of 2003, taken to address underpayment to rural providers. The committee believes it will be important to establish that these financial gains are being maintained.

In addition, major shortages of mental health and substance abuse professionals were documented earlier in this report. On the basis of these shortages, the committee concluded that a major assessment of the funding of mental health and substance abuse services in rural areas is required.



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Quality Through Collaboration: The Future of Rural Health 5 Finance SUMMARY The Quality Chasm report calls for the implementation of payment systems that encourage the delivery of quality health care. This chapter begins by addressing how pay-for-performance initiatives should be implemented in rural communities. The committee recommends that rural demonstration projects be carried out to test different approaches to pay-for-performance systems in rural areas. To establish the right environment for the implementation of pay-for-performance initiatives, financial stability for rural health care delivery systems is required. Such stability is also required to finance investments in human resource networks and information and communications technology. Many rural health care delivery systems have been financially unstable. The chapter addresses the significant policy steps, most recently the Medicare Modernization Act of 2003, taken to address underpayment to rural providers. The committee believes it will be important to establish that these financial gains are being maintained. In addition, major shortages of mental health and substance abuse professionals were documented earlier in this report. On the basis of these shortages, the committee concluded that a major assessment of the funding of mental health and substance abuse services in rural areas is required.

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Quality Through Collaboration: The Future of Rural Health This chapter addresses rural health care finance in three broad areas. The first section examines pay-for-performance as a strategy for improving the quality of health care, as recommended in the Quality Chasm report (IOM, 2001). The second section reviews the various mechanisms used to fund rural health care services generally, while the third focuses on the special case of the funding of rural mental health and substance abuse services. The final section presents conclusions and recommendations. PAY-FOR-PERFORMANCE There is now a large evidence base, as documented in the Quality Chasm report (IOM, 2001) and discussed in Chapter 3, to substantiate a sizable gap between the health care services people receive and the services they should receive based on acknowledged best practices. To encourage providers to improve quality, some private and public purchasers have begun implementing a key recommendation of the Quality Chasm report: to link payments to measures of performance. Because this is a relatively new strategy, there is only limited evidence available on the effects of pay-for-performance programs on quality. The Stanford University and University of California-San Francisco Evidence-based Practice Center, funded by the Agency for Healthcare Research and Quality, has just completed a literature review to identify published randomized controlled trials of incentive systems (Dudley et al., 2004). Of 5,045 publications reviewed, only 9 report results of randomized controlled trials on incentive systems. Of these 9 studies, 8 involved using specific financial incentives as interventions and tested a total of 10 hypotheses (Christensen et al., 1999; Davidson et al., 1992; Fairbrother et al., 2001; Hickson et al., 1987; Hillman et al., 1998, 1999; Kouides et al., 1998; Roski et al., 2003). In 6 cases, the incentive being tested was associated with the desired and statistically significant changes in the delivery of quality care, while in the other 4 cases, there was no significant difference in outcome between the control and the incentive arms of the trial. The remaining study involved reputational incentives as the intervention (Hibbard et al., 2003). In this study, hospitals with low performance scores that were released to the public were significantly more likely to engage in quality improvement activities than hospitals with high performance scores that were released to the public. In summary, pay-for-performance research carried out using randomized controlled trials has produced some positive results. Some of the above trials demonstrated that introducing incentives can lead to desired improvements in the quality of care delivered. However, the scope of this research is still highly

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Quality Through Collaboration: The Future of Rural Health limited. The circumstances in which pay-for-performance techniques will succeed are not well understood. Further, 7 of the above 9 trials focused on the use of incentives to improve preventive care. Pay-for-performance incentives for a broader range of types of care need to be investigated. Major Ongoing Pay-for-Performance Studies Both private- and public-sector payers are now funding some major pay-for-performance studies. These are described in the following subsections. Bridges to Excellence Bridges to Excellence is a General Electric–led employer group initiative1 aimed at improving the quality of care by recognizing and rewarding health care providers who demonstrate that they have implemented comprehensive solutions in managing their patients and deliver safe, effective, patient-centered, timely, efficient, and equitable care (Bridges to Excellence, 2003). The initiative encompasses three programs: Physician Office Link—Based on their implementation of specific processes to reduce errors and increase quality, physicians can earn up to $50 per year for each patient covered by a participating employer or plan. Diabetes Care Link—Enables physicians to achieve 1-year or 3-year recognition for high-quality care, with qualifying physicians receiving an $80 bonus for each diabetic patient covered by a participating employer or plan. Cardiac Care Link—Enables physicians to achieve 3-year recognition for high-quality care, with qualifying physicians eligible to receive up to $160 for each cardiac patient covered by a participating employer and plan. Rewarding Results A national initiative of The Robert Wood Johnson Foundation and the California HealthCare Foundation, Rewarding Results aims to invent, prove, 1   Bridges to Excellence participants include large employers and health plans plus other organizations (including the Centers for Medicare and Medicaid Services, the National Committee for Quality Assurance, the Joint Commission on Accreditation of Healthcare Organizations, and the National Quality Forum) responsible for selecting, collecting, and reporting the measures.

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Quality Through Collaboration: The Future of Rural Health and diffuse innovations in systems of provider payment and nonfinancial incentives that will encourage and reward high-quality health care. The foundations are awarding grants to plan, implement, and evaluate demonstrations of such provider payment systems and nonfinancial incentives (Rewarding Results, 2002). National Voluntary Hospital Reporting Initiative In December 2002, the American Hospital Association, Federation of American Hospitals, and Association of American Medical Colleges launched this initiative to collect and report hospital quality performance information (CMS, 2004a). The associations identified three conditions (acute myocardial infarction, heart failure, and pneumonia) for which they selected 10 measures. The Centers for Medicare and Medicaid Services (CMS) displays the data submitted by hospitals (www.cms.hhs.gov/quality/hospital). By February 2004, more than 1,400 hospitals were providing data on at least one of the measures (CMS, 2004a). Rural hospitals (excluding critical access hospitals) are participating in the study. To encourage participation, Section 501(b) of the Medicare Modernization Act of 2003 mandates that a hospital not submitting performance data for the 10 measures receive a 0.4 percent lower increase in prices for fiscal year 2005 than a hospital submitting such data. Premier Hospital Quality Incentive Demonstration Project Hospitals participating in the joint Premier, Inc.-CMS demonstration project will be eligible for increased Medicare payments if they are among the top performers in one of five clinical areas—heart attack, coronary artery bypass graft, heart failure, community-acquired pneumonia, and hip and knee replacement. The top 10 percent of hospitals in each clinical area will receive a 2 percent increase in Medicare payments; the next 10 percent will receive a 1 percent increase. Within the five areas, CMS will evaluate hospital performance on 34 measures, which include process steps, such as prompt administration of beta blockers, and outcomes, such as mortality rate. In the third year, participating hospitals that have failed to improve their performance in a specific clinical area beyond a minimum threshold established in the first year of the project will be subject to a payment reduction of 1 or 2 percent (CMS, 2004b). Premier, Inc., has announced that 278 hospitals have signed up for the project (Premier, Inc., 2003), 30 percent of

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Quality Through Collaboration: The Future of Rural Health which are rural hospitals, including some critical access hospitals (Personal communication, S. Alexander, May 27, 2004). Pay-for-Performance Program Mandated in the Medicare Modernization Act of 2003 Section 649 of the Medicare Modernization Act of 2003 mandates that the Secretary of Health and Human Services establish a pay-for-performance demonstration program incorporating health information technology and evidence-based outcome measures. A maximum of four sites is mandated: two in urban areas; one in a rural area; and one in a state housing a medical school with a department of geriatrics that manages rural outreach sites and is capable of serving patients with multiple chronic conditions, one of which is dementia. Challenges Facing Rural Providers Even if payment for services is considered adequate by payer and provider alike, additional challenges remain for any effort to incorporate performance measures into payment calculations. First, to the extent that an initiative to pay for performance requires investment in new information systems, other equipment, or additional personnel, rural providers are unlikely to have the reserves or borrowing capacity to provide that capital. Even when the capital is available, most rural providers must apply it to meeting their basic needs: new physical plant and equipment required for basic patient services. For example, many of the nation’s rural hospitals were built during an era when inpatient care was the predominant mode of delivering services and before many changes were made in organizing even that form of care. These hospitals need to be modernized so they can be used as outpatient facilities and be more efficient providers of inpatient care. A second challenge will be providers’ natural proclivity to avoid any risk to their financial well-being—losing either dollars per service or total services. The threats to urban providers of thin or negative margins and losing patient business are too real to be set aside. Those providers in the most precarious financial position will require special consideration. In the most vulnerable places, where patient revenues in the best of circumstances are unlikely to be sufficient to sustain services, subsidies and investments in the tools needed for quality improvement are required (Mueller et al., 2003).

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Quality Through Collaboration: The Future of Rural Health The source of the subsidy could also be the source of investment in quality initiatives designed to improve performance. For example, the Bureau of Primary Health Care has created a special grant program, Health Disparities Collaboratives: Changing Practice, Changing Lives, to achieve rapid improvements in the care provided through community health centers across the country, including those in rural areas. This example highlights the need for external investment in certain rural settings, as well as opportunities to fund that investment. A further challenge in rural areas is one of scale. Measuring performance requires sufficient data to understand incidents in the context of processes of care in systems of health care delivery. As discussed earlier, conducting such analysis in a site that has a very limited number of possible encounters of interest (such as hospital admissions for particular conditions) can yield a distorted picture of the quality of care. To overcome this challenge, data can be aggregated across like providers in similar delivery systems to increase the number of patient encounters for which quality outcomes can be determined. Pay-for-Performance Objectives, Approaches, and Measures To date, pay-for-performance programs have focused primarily on encouraging providers to make changes in their own health care practices that will improve the quality of care for their patients. The committee believes that rural areas provide an opportunity to experiment with pay-for-performance strategies designed to encourage improvements in both individual practices and the overall community health system. Eventually, those demonstrations might be expanded even further to reward improvements in community health status, thus encouraging health care leaders to work collaboratively with other community leaders from educational institutions, social service agencies, and places of employment to achieve such improvement. In sum, then, pay-for-performance incentives should seek to improve the quality of care delivered to individual patients and ultimately to raise the overall health status of the community. In particular, they should seek to encourage: Health care providers to make changes in their own practices that will improve the quality of care for individual patients. Health care providers to develop stronger collaborative relationships with each other to provide comprehensive, coordinated care where appropriate, for example, for chronically ill patients.

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Quality Through Collaboration: The Future of Rural Health Patients and their families to identify and demand high-quality care. The development of communitywide initiatives aimed at improving health behaviors. Several financial approaches, possibly in combination, are available to achieve the above objectives: Giving providers higher payments for higher performance on quality measures. Requiring the payment of lower cost-sharing amounts and copayments if patients go to higher-quality providers as identified through quality measures. Sharing the savings from quality improvements between providers and patients. Employing risk sharing and capitation—payment mechanisms that provide incentives for better overall management of care across settings and time. An important and difficult aspect of designing an incentive program is identifying appropriate measures of performance. Chapter 3 provides a detailed discussion of quality and quality measures. For each condition or group of conditions, a balanced set of measures is needed addressing the six quality aims set forth in the Quality Chasm report: safety, effectiveness, patient-centeredness, timeliness, efficiency, and equity (IOM, 2001). Further, measures are required for both individual and population health. In crafting these measures, consideration must be given to the cost and difficulty of applying them; standardization of measures will be helpful in this regard. Particularly important in the context of the present report is that the chosen measures must be capable of being applied to rural health care systems. Meeting this need may require addressing certain methodological issues; for example, small numbers for each facility may call for pooling of facilities. Nearly all pay-for-performance experimentation is sponsored by health plans (Rosenthal et al., 2004) that serve primarily urban areas. The committee believes that there should be much greater pay-for-performance experimentation in rural areas than is currently planned and that there should be five pay-for-performance demonstration projects in rural communities—significantly more than the maximum of two mandated by the Medicare Modernization Act of 2003. These projects should be built around existing rural groupings of health care providers, for example, of rural health clinics, com-

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Quality Through Collaboration: The Future of Rural Health munity health centers, and critical access hospitals. There should also be a demonstration project involving the linkage of several types of health care providers, such as hospitals, community health centers, and nursing homes. Finally, the payment methods tested should include both patient-based and community-based measures. The pay-for-performance demonstration projects could also include incentives for using innovative ways of reducing waste. For example, in the delivery of primary care, potential savings might be derived from e-visits, group visits, and less-costly ways of handling chronic illness. THE FUNDING OF RURAL HEALTH CARE Significant proportions of the $1.55 trillion spent on health care in the United States in 2002 were spent on hospital care (31.3 percent), physician and clinical services (21.9 percent), dental services (4.5 percent), and nursing home and home health care (9.0 percent)2 (Levit et al., 2004). In 2000, 1.3 percent of the total health care expenditure ($17 billion) was devoted to public health (Frist, 2002). The financing of health care requires both payments for goods and services and capital for investment. Sources of payment for goods and services are both private (e.g., private insurance and direct patient payment) and public (e.g., public insurance programs such as Medicare and Medicaid, as well as federal, state, and local taxes). There are three sources of capital: the reserves providers accumulate, debt financing, and philanthropy. Many types of health care providers in rural areas are highly dependent on Medicare and Medicaid for payment for services, and in some instances much more so than their urban counterparts. It has proven problematic to adapt the Medicare Prospective Payment System mandated in 1983 for inpatient hospital payments and in 1997 for outpatient and other services to the special circumstances of rural health. In some cases, the Prospective Payments System has led to underfunding of rural care. Moreover, recent stresses on state budgets have led to pressures to cut Medicaid rates and to restrict eligibility for the benefits, thereby reducing revenues for rural health care providers. 2   Other major spending items are retail sales of medical products (mainly prescription drugs) (13.7 percent of the total), other professional services (3.0 percent of the total), other personal health care (2.9 percent of the total), administrative costs (6.8 percent of the total), and investment (3.7 percent of the total).

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Quality Through Collaboration: The Future of Rural Health This section addresses the rural aspects of Medicare payments to hospitals and primary care physicians, as well as the funding of rural health clinics, community health centers, dental services, nursing homes, home health services, emergency medical services, and public health services. Weak financial performance by rural hospitals impacts their ability to raise capital, and this issue is addressed in the final subsection. Medicare Hospital Payments As suggested above, hospitals in rural areas (see Appendix C for an overview) are particularly dependent on Medicare funds. In 1999 Medicare paid 45 percent of total costs in rural hospitals as compared with 34 percent for their urban counterparts (MedPAC, 2001). Among rural hospitals, Medicare accounted for 60 percent of inpatient days in 1999, and for those hospitals with fewer than 50 beds, the proportion rose to 63 percent (Moscovice and Davidson, 2003). Over the years since 1983, concerns about whether rural hospitals could survive under the Prospective Payment System have led Congress to create special categories of rural hospitals that receive either cost-based payments or elevated Prospective Payment System payments: rural referral centers, sole community hospitals, Medicare-dependent hospitals, and, most recently, community access hospitals. Notwithstanding these adjustments, throughout the 1990s inpatient Medicare margins for rural hospitals were substantially below urban margins. In the early 1990s, Medicare inpatient aggregate margins3 were negative for both urban and rural hospitals. In the mid-1990s, inpatient margins began to improve, with aggregate inpatient margins being higher for urban than for rural hospitals. In 1997, urban hospital inpatient margins reached a peak of 18.0 percent, while the margins for rural hospitals reached a peak of 10.3 percent. Thereafter, inpatient margins began to decline: by 1999, urban inpatient margins had fallen to 13.5 percent and rural margins to 4.1 percent (see Table 5-1). Indeed, by 1999 over a third of all rural hospitals had negative Medicare inpatient margins (MedPAC, 2001). During the late 1990s, the overall Medicare margin (including inpatient, outpatient, home health, skilled nursing, and psychiatric and rehabilitation 3   The inpatient margin is calculated (in percentage terms) as the difference between inpatient payments and Medicare-allowable costs divided by inpatient payments (MedPAC, 2001). The same general approach is used for the overall Medicare margin and the total margin.

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Quality Through Collaboration: The Future of Rural Health TABLE 5-1 Medicare Inpatient Hospital Margins, by Urban and Rural Location, 1990–1999 Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Urban –1.2 –2.2 –0.8 1.6 6.4 11.8 16.8 18.0 14.8 13.5 Rural –3.7 –3.7 –1.4 –0.5 0.6 6.1 10.3 9.5 5.5 4.1 SOURCE: MedPAC, 2001. units) for rural hospitals was several points lower than the inpatient Medicare margin (see Table 5-2). By 1998, when some Balanced Budget Act payment policies went into effect, the overall Medicare margin for rural hospitals had dropped 6 percentage points to –2.1 percent. In subsequent years, the overall margin has remained at approximately this level: –2.9 percent in 1999, –2.4 percent in 2000, –1.9 percent in 2001, and –3.9 percent in 2002 (MedPAC, 2001, 2004b). In December 2003, Congress passed the Medicare Modernization Act, which modified Medicare payment policies for rural providers. These changes, effective in 2004, are expected to create an environment of greater financial stability for rural hospitals. For all rural hospitals, excluding those converted to community access hospital status by fall 2003, MedPAC expects the overall Medicare margin in 2004 to be 2.3, several points higher than the actual overall Medicare margin in 2002 of –3.9 (see Table 5-3). Issues concerning the adequacy of rural hospital payments will continue to be raised, however, and rural hospital finance needs to be reviewed peri- TABLE 5-2 Medicare Inpatient (1996–1999) and Overall (1996–2002) Rural Hospital Margins Year 1996 1997 1998 1999 2000 2001 2002 Rural hospital Medicare inpatient margin 10.3 9.5 5.5 4.1       Rural hospital Medicare overall margin 5.0 4.1 –2.1 –2.9 –2.4 –1.9 –3.9 SOURCE: MedPAC, 2001, 2004b.

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Quality Through Collaboration: The Future of Rural Health TABLE 5-3 Overall Medicare Margins for Rural and Urban Hospitals Year 2002 (actual) 2004 (estimated) Rural hospitals –3.9 2.3 Urban hospitals –2.6 1.3 NOTE: The table includes data from all hospitals covered by Medicare’s inpatient Prospective Payment System, except those hospitals converted to critical access hospital status by fall 2003 (about 850). SOURCE: MedPAC, 2004a: Chart 7-18. odically. This is the case not least because the more generous margins4 provided by private-sector health insurers that have helped sustain rural hospitals may be reduced in an increasingly price-competitive environment. Medicare and Medicaid Payments to Primary Care Physicians Similar to the situation with hospitals, rural physicians (see Appendix C for an overview) rely more on Medicare and Medicaid payments than their urban counterparts. Data from the 2000–2001 Community Tracking Study Physician Survey conducted by the Center for Tracking Health System Change reveal that rural physicians receive 38 percent of their payments from Medicare, while urban physicians receive 34 percent (difference significant at p = 0.01); likewise, rural physicians receive 19 percent of their payments from Medicaid, while urban physicians receive 14 percent (difference significant at p = 0.01) (Personal communication, K. J. Mueller, June 23, 2004). Medicare is also important to physicians in rural areas because it is a price leader, with private insurers often using fee schedules based on the Medicare schedules (Ginsburg, 2002). The annual uprating and the geographic weighting factors of Medicare 4   For the period 1996–1999, overall margins were considerably higher than overall Medicare margins for rural hospitals. Total margins for rural hospitals were 7.1 percent (1996), 6.6 percent (1997), 4.7 percent (1998), and 4.7 percent (1999). Overall Medicare margins for rural hospitals were 5.0 percent (1996), 4.1 percent (1997), –2.1 percent (1998), and –2.9 percent (1999) (MedPAC, 2001).

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Quality Through Collaboration: The Future of Rural Health BOX 5-1 Ambulance Services: Medicare Payments Can Be Better Targeted to Trips in Less Densely Populated Rural Areas In 2002, the Centers for Medicare and Medicaid Services implemented a new ambulance fee schedule, under which providers receive a base payment (dependent on the kind of services delivered) plus a mileage payment. There is a rural adjustment for the mileage payment, increasing payments for trips that begin in rural areas. The General Accountability Office (GAO) found that trip volume is the key factor affecting differences in ambulance providers’ cost per trip (GAO, 2003a). The majority of ambulance providers’ costs reflect readiness—the need to have an ambulance and crew available. These costs are fixed. Thus, providers that make fewer trips tend to have higher costs per trip. In 2001, rural counties averaged 1,200 Medicare-covered trips (both emergency and nonemergency), while urban counties averaged 9,100 trips. Moreover, the number of Medicare-covered trips provided in rural areas varied greatly with population density. The quarter of rural counties that are most densely populated averaged 2,000 Medicare trips, while the quarter of rural counties that are least densely populated averaged just 300 Medicare trips. Ambulance providers are paid on average 16 percent more for trips originating in the least densely populated quarter of rural counties than for trips originating in the most densely populated quarters of rural counties. This modest difference is much smaller than the nearly eightfold difference in average trip volumes (the key factor affecting cost per trip) between the least and most densely populated quarter of rural counties. The GAO report recommends that the Centers for Medicare and Medicaid Services better target the Medicare rural payment adjustment for trips provided in rural counties with low population densities by adjusting base rates rather than the mileage rate. from local government, 22 percent from state government (including federal pass-through funds), 14 percent from service reimbursement, and 3 percent directly from the federal government. By contrast, nonmetropolitan local public health agencies received 34 percent of their funds from local government, 35 percent from state government (including federal pass-through funds), 25 percent from service reimbursement, and 3 percent directly from the federal government. The IOM’s Committee on Assuring the Health of the Public in the 21st Century recently called for the Department of Health and Human Services to develop a comprehensive investment plan for a strong governmental public health infrastructure, with federal, state, and local governments providing adequate and sustainable funding for this purpose (IOM, 2003). Recent legislation—the Public Health Threats and Emergencies Act of 2000 and

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Quality Through Collaboration: The Future of Rural Health TABLE 5-5 Sources of Funding for Local Public Health Agencies   Metropolitan Nonmetropolitan Local public health agency 58 percent 34 percent State government* 22 percent 35 percent Service reimbursement 14 percent 25 percent Federal government 3 percent 3 percent Other 3 percent 3 percent *Including federal pass through money. SOURCE: NACCO, 2001. the Public Health Security and Bioterrorism Preparedness and Response Act of 2002—aimed at improving bioterrorism preparedness will help strengthen the public health infrastructure. Access to Capital for Rural Hospitals Following the expression of concern (NACRHHS, 1999) about the need to repair or replace aging rural hospitals, the Walsh Center for Rural Health Analysis, University of Chicago, carried out a survey of 950 rural hospitals with under 50 beds to identify their capital needs and their ability to borrow funds (Stensland et al., 2002). As part of this survey, funded by the Health Resources and Services Administration, respondents were asked to estimate for their hospital the annual charges for borrowing $1 million. Of 221 respondents, 81 percent (178) were able to estimate their cost of capital, while the remainder (43) stated they would not qualify for a $1 million loan. The latter hospitals tended to be older, lower-volume facilities with operating losses. Likewise, a more recent survey, undertaken by the Rural Health Research Center, University of Minnesota, indicated that a significant proportion of critical access hospitals has difficulty raising capital. Of the critical access hospitals surveyed (95 percent response rate) 39 percent indicated that they had experienced an important capital need of at least $250,000 and had not tried to borrow the money because they had no chance of obtaining it (Gregg, 2004).

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Quality Through Collaboration: The Future of Rural Health Two national programs have evolved over the years to help less credit-worthy hospitals—the Department of Housing and Urban Development’s (HUD) Hospital Mortgage Insurance Program and the Department of Agriculture’s Community Facilities Program. The Hospital Mortgage Insurance Program, commonly know as the HUD Section 242 Program, was established in 1968 to soften the impact of the sunsetting Hill-Burton Program. It has served primarily as a source of capital for urban facilities. The Community Facilities Program, started in 1972, is the lender of last resort to a wide range of eligible rural organizations in addition to hospitals. The two programs have provided only modest capital outlays to rural hospitals, only a quarter of which have been able to take advantage of them (Gregg et al., 2002). In addition to these two federal programs, there are about two dozen state-operated capital-related programs for which rural hospitals may be eligible. Almost three-quarters of these programs provide capital through grants, while a quarter do so through loans (Gregg et al., 2002). Another, more limited program, focused on rural health care facilities, is the Southern Rural Access Program. This program is designed to help improve access to basic health care in eight of the most rural, medically underserved states in the country (Alabama, Arkansas, Georgia, Louisiana, Mississippi, South Carolina, (East) Texas, and West Virginia). To achieve these goals, the program emphasizes the development of rural health leadership, rural health networks, and revolving loan funds, as well as recruitment and retention of primary health care providers (Stewart et al., 2003). The program is funded by The Robert Wood Johnson Foundation and administered by the Pennsylvania State College of Medicine. As of November 2002, loans totaling $31 million6 had been approved (Stewart et al., 2003). One key to increasing access to capital for rural hospitals is to devise strategies for increasing their profitability. Recent survey data on critical access hospitals suggest that the longer hospitals operate in this capacity, the greater is the likelihood that they will be able to make investments that can have an impact on their continued financial profitability (Gregg, 2004). Implementation of the Medicare Modernization Act of 2003 can be expected to improve the operating margins of some rural hospitals. However, for those rural hospitals that are in serious financial difficulties and whose operations meet clear and pressing health care needs of their local populations, new policies are required. 6   By the end of 2004, loans totaling $40 million are expected to have been approved (Personal communication, M. Beachler, June 2004).

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Quality Through Collaboration: The Future of Rural Health Need for Financial Stability Many parts of the rural health care delivery system have been financially fragile (for example, rural hospitals) or subject to payment uncertainties (for example, Medicare physician fees and Medicaid fees in general). In response, Congress has sought, most recently through the Medicare Modernization Act of 2003, to improve the financial climate for rural health care. Periodic reviews of the impact of this act on the financing of rural health care would, however, be prudent. Financial stability is required if rural health care facilities are to make the investments in human resource networks and information and communications technology required to deliver high-quality care on a consistent basis and establish a solid platform for the implementation of pay-for-performance systems. THE FUNDING OF RURAL MENTAL HEALTH AND SUBSTANCE ABUSE SERVICES In 1997, $85 billion, or 8 percent of total health care expenditures, was spent on mental health and substance abuse services. Of this amount, 86 percent ($73 billion) was for the treatment of mental health disorders and 14 percent ($12 billion) for the treatment of substance abuse disorders (Coffey et al., 2000). The majority of the funding of mental health and substance abuse treatment comes from public sources—the opposite of all health care spending. In 1997, public sources funded 58 percent of mental health and substance abuse treatment, as compared with 46 percent of all health services. The public sources were Medicaid (20 percent), Medicare (12 percent), other state and local sources (20 percent), and other federal sources (6 percent), while the private sources were private insurers (24 percent), out-of-pocket payments (16 percent), and other private sources (2 percent) (Coffey et al., 2000). Private insurance, paying about a quarter of all mental health and substance abuse services, continues to place special limits on mental health benefits despite legislation designed to achieve parity between private mental health and general health insurance. The Mental Health Parity Act of 1996 prevented health plans from placing annual or lifetime financial limits on coverage of mental illnesses unless such limits existed for other medical services. Yet despite this federal legislation and state parity laws, the large majority of insured workers in employer-sponsored health plans in 2002 were still subject to special limits on mental health benefits: 74 percent of covered

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Quality Through Collaboration: The Future of Rural Health workers were subject to annual outpatient visit limits and 64 percent to annual inpatient day limits (Barry et al., 2003). Mental health care services are provided in a variety of settings. As noted earlier, primary care physicians are important providers of mental health services in rural areas (DeGruy, 1996; Ivey et al., 1998). Mental health centers (formerly designated “community mental health centers” by the federal government) have shifted their focus to caring for those with serious and persistent mental illness and seriously emotionally disturbed children, largely because their block grant funding is restricted to these populations (Wagenfeld et al., 1994). Recently, the Bureau of Primary Health Care expanded the role of federally qualified health centers in providing mental health and substance abuse services for underserved populations (Lambert and Agger, 1995). Moreover, fewer rural than urban hospitals offer inpatient psychiatric services (Hartley et al., 1999). Overall, there are major shortages of mental health professionals in rural areas (see Appendix C). In September 1999, 87 percent of the 1,669 federally designated mental health professions shortage areas were rural counties (Bird et al., 2001). Given the shortage of mental health and substance abuse services in rural areas, the committee believes a major assessment of the availability and funding of those services in rural areas is needed. CONCLUSIONS AND RECOMMENDATIONS Pay-for-Performance The introduction of pay-for-performance approaches offers much potential to align payment incentives with the quality aims of the health system, but there is work to be done before these approaches can be implemented successfully in rural communities. Many rural providers lack the necessary quality infrastructure to participate in these payment programs. As discussed in Chapter 3, steps should be taken immediately to identify a set of standardized performance measures appropriate for use in rural communities, and technical assistance should be available to assist rural providers in establishing quality improvement programs. Chapter 6 addresses the need to invest in electronic health record systems that give clinicians immediate access to complete patient information and clinical knowledge, and provide the data needed to measure and continuously improve performance. It would also be wise to conduct demonstration projects in rural communities to test alternative approaches to pay-for-performance.

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Quality Through Collaboration: The Future of Rural Health Recommendation 5. The Centers for Medicare and Medicaid Services should establish 5-year pay-for-performance demonstration projects in five rural communities starting in fiscal year 2006. During the first 18 months, the communities should receive grants and technical assistance for establishing processes to capture the patient data and other information needed to assess performance using a standardized performance measure set appropriate for rural communities. For the remaining 3.5 years, different approaches to implementing pay for performance should be tested in the various demonstration sites. The selected communities should be diverse with respect to socio-demographic variables, as well as the degree and type of formal integration of local and regional providers. The Funding of Rural Health Care Many rural health care delivery systems are financially unstable. Although significant steps have been taken to correct historical underpayment of rural providers under Medicare, the operating margins of many hospitals are still very low, and concerns about the equity of physician payments persist. Rural providers have been heavily impacted as states have modified eligibility criteria or lowered provider payments under Medicaid and the Children’s Health Insurance Program in response to worsening state financial conditions. Rural health care delivery systems must be financially stable if they are to finance investments in human resource networks and information and communications technology and to implement pay-for-performance initiatives. The committee concludes that an assessment is needed of the aggregate impact of changes in the Medicare program, state Medicaid programs, private health plans, and insurance coverage on the financial stability of rural health care providers, and that the Agency for Healthcare Research and Quality is well positioned to coordinate this assessment. Recommendation 6. Rural health care delivery systems must be sufficiently stable financially to underwrite investments in human resources and information and communications technology and to implement pay-for-performance initiatives. The Agency for Healthcare Research and Quality should produce a report by no later than fiscal year 2006 analyzing the aggregate impact of changes in the Medicare program, state Medicaid programs, private health plans, and insurance coverage on the financial stability of rural health care providers. The report should detail specific actions that should be

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Quality Through Collaboration: The Future of Rural Health taken, if needed, to ensure sufficient financial stability for rural health care delivery systems to undertake the desired changes described in this report. The Funding of Rural Mental Health and Substance Abuse Services Given the shortages of mental health and substance abuse providers in rural areas, the committee concludes that a comprehensive assessment is needed of the availability of mental health and substance abuse services in rural areas (recognizing that another IOM committee is currently exploring the implications of the Quality Chasm report for the field of mental health and addictive disorders). Recommendation 7. The Health Resources and Services Administration and the Substance Abuse and Mental Health Services Administration should conduct a comprehensive assessment of the availability and quality of mental health and substance abuse services in rural areas. This assessment should cover services provided in both primary care and specialty settings, and should include the following: A review of (1) the various insurance and direct service programs in the public and private sectors that provide financial support for the delivery of mental health and substance abuse services and (2) the populations served by these payers and programs. An evaluation of the adequacy of current funding and an analysis of alternative options for better aligning the various funding sources and programs to improve the accessibility and quality of these services. Attention should be focused on identifying and analyzing options designed to encourage collaboration between primary care and specialty settings. REFERENCES Barry CL, Gabel JR, Frank RG, Hawkins S, Whitmore HH, Pickreign JD. 2003. Design of mental health benefits: Still unequal after all these years. Health Affairs 22(5):127–137. BDO Seidman. 2003. A Report on Shortfalls in Medicaid Funding for Nursing Home Care. Washington, DC: American Health Care Association. Bird DC, Dempsey P, Hartley D. 2001. Addressing Mental Health Workforce Needs in Underserved Rural Areas: Accomplishments and Challenges. Portland, ME: Edmund S. Muskie School of Public Service, Maine Rural Health Research Center.

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