DHA 721 Week 8 Economic Analysis of a Health Policy Decision Example

Two Patients a Night: Should the Region's Smallest Hospital Give Up Its Beds for Rural Emergency Hospital Status?

[Student Name]

University of Phoenix

DHA/721: Health Care Economics

Week 8 Assignment

[Instructor Name]

[Date]

The hospital, its census, revenues, costs, projections and conditions are composites written for a model paper; research findings and program features come from the sources cited.

Last year the smallest of the region's hospitals, with fifteen licensed beds and cost-based Medicare payment, lost $1.8 million serving a county of roughly eleven thousand residents. Its emergency department saw about 7,400 visits, but its inpatient census averaged 2.3 patients a night, including patients in swing beds recovering before going home. Its board wanted to know whether the new Medicare status for emergency-only rural sites, which trades inpatient beds for fresh payments, made sense, and it turned to the regional vice president for the numbers. What follows is that analysis, built with the tools of the course.

The Policy

Congress created the Rural Emergency Hospital designation in the Consolidated Appropriations Act of 2021 to preserve emergency and outpatient services where full-service hospitals cannot be sustained. A converted hospital must keep a 24-hour emergency department but may not provide inpatient care, and from 2023 it receives a 5% add-on to Medicare outpatient rates plus a new facility payment (Chatterjee et al., 2022).

The Incentives

The policy pays hospitals to stop doing something that loses money and to keep doing something communities need. It rewards a smaller footprint with a guaranteed payment. It also changes incentives around transfers: once converted, the hospital earns nothing from admitting patients and must send them elsewhere.

Who Is Eligible, and How They Fare

Chatterjee and colleagues identified 1,569 rural hospitals eligible for the designation in 2019, most of them critical access hospitals, and found that they had lower operating margins than noneligible rural hospitals, -1.0% compared with 3.5%, relied on outpatient payments for about two thirds of their Medicare revenue and offered fewer emergency, outpatient and telehealth services; they estimated the facility payment at about $3 million a year per hospital, larger than the typical outpatient add-on (Chatterjee et al., 2022). The region's hospital fits the profile closely.

The Marginal Analysis: Inpatient Care

Marginal analysis asks which revenues and costs would change. Inpatient and swing bed services brought in about $4.9 million last year. Avoidable inpatient costs, including night nursing on the inpatient unit, hospitalist coverage, dietary services and part of pharmacy, totaled about $5.3 million. Ending inpatient care would therefore improve the margin by about $0.4 million before any new payments. Overhead such as administration, the building and information systems would not fall, since the emergency department and clinics would still need them; the analysis counts only costs that would truly disappear. The emergency department would keep its physician, nurses and laboratory and imaging coverage, and observation care for short stays would continue under the designation's rules.

The Marginal Analysis: Payment Changes

As a critical access hospital, the facility is paid by Medicare on the basis of its reasonable costs. After conversion, outpatient services would be paid at prospective rates plus 5%, which the finance team estimates would reduce outpatient revenue by about $1.1 million a year. The facility payment, about $3.3 million a year at current rates, would more than offset that loss. The payment is fixed and does not depend on volume, which makes the hospital's finances more predictable but also exposes it to future changes in federal law.

The Bottom Line for the Hospital

Adding the pieces, a $1.8 million loss becomes a projected gain of about $0.8 million: $0.4 million from ending inpatient care, plus $3.3 million in facility payments, minus $1.1 million in lower outpatient payments. For a hospital with two inpatients a night, the most valuable bed may be the one it stops staffing.

Defining the Counterfactual

The right comparison is not today's hospital continuing forever, but what would actually happen without conversion. The hospital has 41 days cash on hand, and its losses have grown for four years. Kaufman and colleagues looked back at 2009 finances and found that the critical access hospitals that went on to close in the next five years were already weaker than survivors on margins, cash, equity, volume and staff, suggesting hospitals at risk can be identified in advance (Kaufman et al., 2016). By those measures, the hospital is at risk.

A Caution From Survival Evidence

Closure is not certain. Carroll and colleagues studied rural markets from 2010 to 2018 and found that 77% of hospitals unprofitable at baseline continued operating without closure or merger, and about half of those returned to profitability (Carroll et al., 2023). The network's support could keep the hospital open for years, but at a growing subsidy.

Effects on Patients

About 170 patients a year who would have been admitted, plus about 40 swing bed patients, would instead be cared for elsewhere, most to the network's regional hospital forty-five miles away. Travel burdens families, especially older spouses without reliable transportation. Some patients who would have stayed one or two nights for dehydration or a mild pneumonia might instead be treated in observation and sent home, which many would prefer, while sicker patients would receive care at a hospital with more specialists. Swing bed patients would recover in a skilled nursing facility or a regional hospital instead.

Effects on the Network

The network would capture most transferred admissions at its regional hospital, which has capacity. That offsets part of the lost local revenue at the system level but adds to demand for ambulances, already scarce in the county.

Effects on the Community

About 34 inpatient jobs would be eliminated, though the network would offer positions at other sites. The emergency department, clinics, laboratory, imaging and outpatient services would remain, preserving most local access and the hospital's role as the county's largest employer.

Efficiency and Equity

On efficiency grounds, conversion is strong: it stops staffing an inpatient unit that is empty most of the time and redirects resources to services the community uses daily. On equity grounds, the effects are mixed. Emergency access is preserved, but families of admitted patients, many older and poorer, bear new travel costs.

The Recommendation

The vice president recommended conversion, subject to four conditions: a transfer agreement guaranteeing acceptance at the regional hospital, a funded second ambulance for the county, telehealth follow-up for transferred patients' families and a skilled nursing partnership to replace swing beds. Each condition addresses a specific harm identified in the analysis.

What Would Change the Recommendation

The recommendation would change if Congress reduced the facility payment, if ambulance coverage could not be secured or if inpatient volume grew substantially through the obstetric and behavioral health strategies elsewhere in the region.

Measures

Measures include emergency visits, transfer times, ambulance response times, readmissions of transferred patients, family travel burden, operating margin and community satisfaction, reviewed at one and two years.

Conclusion

With two inpatients a night and a growing loss, the region's smallest hospital faces a choice. Marginal analysis shows conversion would turn a $1.8 million loss into a modest gain while preserving emergency care. Evidence on eligible and closing hospitals supports the case, and survival evidence counsels care. Conversion with firm conditions is the better path.

References

Carroll, C., Euhus, R., Beaulieu, N., & Chernew, M. E. (2023). Hospital survival in rural markets: Closures, mergers, and profitability. Health Affairs, 42(4), 498-507. https://doi.org/10.1377/hlthaff.2022.01191

Chatterjee, P., Klebanoff, M. J., Huang, Q., & Navathe, A. S. (2022). Characteristics of hospitals eligible for rural emergency hospital designation. JAMA Health Forum, 3(12), Article e224613. https://doi.org/10.1001/jamahealthforum.2022.4613

Kaufman, B. G., Thomas, S. R., Randolph, R. K., Perry, J. R., Thompson, K. W., Holmes, G. M., & Pink, G. H. (2016). The rising rate of rural hospital closures. The Journal of Rural Health, 32(1), 35-43. https://doi.org/10.1111/jrh.12128