Ailing rural hospitals look for Medicare relief

ALGONA, Iowa -- Dr. Stephen Richards' smile vanishes after his patients have left and the conversation turns to the realities of running a small, farm-town hospital.

Last fiscal year, the 40-bed Kossuth Regional Health Center had a $3 million budget and finished $680,000 in the red -- the biggest deficit in Richards' quarter-century on its staff.

"We're able to keep the system running because we've tightened screws, become more efficient and held costs down, but how much more can we keep doing that?" Richards said.

Some relief may be just over the horizon.

House and Senate versions of Medicare prescription drug legislation would provide $25 billion to $28 billion over the next decade to reduce the gap in Medicare reimbursement rates between urban hospitals and rural ones.

Under a complex formula developed more than 20 years ago, hospitals in San Francisco and New York get an average of 1.6 percent more for the same procedures than those in Iowa, Montana or Kansas.

A separate formula that factors in malpractice premiums and regional cost and wage differences also reimburses urban doctors at a higher rate than rural ones.

For example, Medicare now pays a hospital in Bismarck, N.D., $3,988 for a heart failure procedure. For the same procedure, a hospital in New York is paid $6,460, according to Rep. Earl Pomeroy, D-N.D.

The differential is based on assumptions that it is cheaper to provide health care in small towns than bigger cites.

Lawmakers, health experts and Medicare officials differ on whether those assumptions are still valid.

Malpractice premiums, office rent and cost of living all tend to higher in urban areas, according to the Centers for Medicaid and Medicare Services, a division of the Health and Human Services Department. Urban hospitals also tend to have higher hospitalization rates and longer hospital stays, and also offer a wider variety of services.

But lawmakers from rural areas and some policy advocates point to examples where costs are higher in the countryside.

Rick Pollack, executive vice president of the American Hospital Association, said rural hospitals also lack the patient volume of big-city facilities that helps spread the cost of services, new equipment, salaries and day-to-day operations.

Moreover, smaller hospitals have been forced to raise salaries to compete with better-paying urban hospitals, Pollack said. Richards said several veteran nurses have left his hospital in the past 18 months for higher-paying jobs in Minnesota; another flies to Hawaii every two weeks to work shifts at a hospital there.

"It's no secret that those old formulas are unfair to rural doctors and rural hospitals," said Republican Sen. Charles Grassley of Iowa.

Aggravating the problem are the much more rapidly aging populations of rural states. Many young people are leaving the countryside for higher-paying jobs in the cities, and rural hospitals are increasingly reliant on Medicare patients.

In 2000, more than 50 percent of the nation's 2,200 rural hospitals reported that Medicare made up more than half of their gross revenue, compared with 31 percent of urban hospitals, according to the AHA.

Across Iowa, Medicare patients represent about 16 percent of the population, a figure matched by Maine, North Dakota, South Dakota, Arkansas, Alabama and Pennsylvania. Only Florida and West Virginia have more at 17 percent.

"We are dependent on Medicare, and that makes us vulnerable," said Scott Curtis, administrator at Kossuth Regional, where more than 60 percent of the patients last year were Medicare beneficiaries.

Seventy-five members of the newly formed Congressional Rural Caucus obtained the extra money for rural health care after threatening to vote against the prescription drug bill.

Grassley said the $25 billion for rural providers would be paid for with savings and cuts in other Medicare programs and freezes in payments to update medical equipment. The House version calls for $28 billion.

Lawmakers from urban areas have gotten assurances that Medicare payment rates for their health care providers would not be reduced.

Both versions of the legislation would raise the base rates small and rural hospitals receive to the same level as large urban hospitals and adjust the wage index used in calculating payments.

Whether that will actually occur remains uncertain. The House and Senate bills have widely different approaches to the bigger issue driving the bill -- a looming fiscal crisis for the Medicare program as the baby boomers reach old age. There are doubts the two versions can be merged into a compromise, even with a nudge from President Bush.

"I'm really skeptical," said Keith Mueller, director of the RUPRI Center for Rural Health Policy Analysis at the University of Nebraska. "The key differences in the entire bill are pretty fundamental and philosophical, not partisan."

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On the Net

Iowa Hospital Association: www.ihaonline.org

Medicare: www.medicare.gov