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Three paths forward for rural health
The pandemic accelerated a decades-long trend of rural health crumbling--will private equity be the only entity picking up the pieces?
A year ago, the Washington Post published a heartbreaking account of a rural hospital in Oklahoma, stretched just past its breaking point. Nurses stayed on as volunteers when payroll ran out, working 16-hour overnight shifts for free.
“If we aren’t open, where do these people go?” asked a physician assistant, thinking about the dozens of patients he treated each month in the ER, including some in critical condition after drug overdoses, falls from horses, oil field disasters or car crashes.
“They’ll go to the cemetery,” another employee said. “If we’re not here, these people don’t have time. They’ll die along with this hospital.”
But that was a year ago, and the pandemic just made all of this much worse.
Decades of limited political attention to rural health has left a crumbling network of underfunded hospitals and providers, preyed upon by private equity owners looking for a quick investment turnaround. Republican governors refused to expand Medicaid, leaving their populations without access to care. The largely rural South continues to suffer slower population growth, grinding poverty, and structural racism, all factors that contribute to some of the worst health outcomes in the country.
Then, into this milieu came the the pandemic’s forced shutdown of nonessential businesses, including the offices of physicians who practice non-emergency care. Physicians and hospitals got some stimulus funding, and they were able to apply for advances in Medicare payments. But “[f]or us, this was survival money and we spent it already,” one hospital CEO told NPR this week.
The CARES Act removed some restrictions around telehealth visits, making it easier for physicians to conduct telehealth visits and get reimbursed for it, but it didn’t entirely cover lost revenue. The success of telehealth in rural areas is heavily constrained by patients’ lack of access to broadband.
(Telehealth, tangentially, was long supposed to be a panacea for rural health—if rural residents could just access doctors via computer, they wouldn’t have to go to physical offices. But it turns out that the broadband issue, along with the very real losses a community suffers without nearby hospitals and community physicians, make telehealth less of a cure-all than expected.)
With rural health care poised on a knife’s edge, there are a few potential paths forward; one that I see as the status quo continued, and two that see intentional action from state regulators and local entrepreneurs to save rural health. These paths aren’t mutually exclusive and are not comprehensive, but these seem like the most obvious potential paths to me:
Do nothing: private equity takes over, small hospitals collapse, a shell is left
Wait for Centers for Medicare & Medicaid Services (CMS) and maybe a few start-ups: some rural health innovation but it comes too late for most areas
States take action: using available policy levers, lawmakers stave off rural care collapse by directly confronting the power of private equity and large hospital systems
Where we are
In 2006, Bain Capital Partners and a consortium of other private equity partners went in together to buy Hospital Corporation of America (HCA), a large system of 176 hospitals. The consortium made large profits; Bain raked in approximately 10x its initial investment.
HCA’s 203 locations present day
Eyeing Bain’s success, other private equity shops wanted into the hospital game. When the 2010 Affordable Care Act became law, the fervor increased; private equity firms anticipated the ACA would increase demand for care as more people became insured. By 2011, the “high-water mark” of private equity ownership of hospitals, 7 of the 12 largest for-profit hospitals were private equity-owned.
Most of these investments, however, weren’t as successful as Bain’s. Private equity firms struggled to manage the large hospital systems under their control and still exit the investment within their desired 3-5 year timeframe. And with (mostly rural, Southern) states choosing not to expand Medicaid as part of the ACA, the anticipated demand for care never quite materialized. Some private equity owners found themselves over-leveraged, with too many hospitals to manage, and they began selling off lower revenue hospitals that weren’t financial assets to the broader health system.
Private equity is less interested in hospitals now. According to Eileen Appelbaum, who studies private equity in health care, private equity has recently turned to rolling up smaller, specialty physicians’ offices, seeing an easier management process and potential for high returns.
To my knowledge, there’s no data on the outcomes of hospitals spun off of private equity systems during the mid-to-late 2010s, but many of them likely closed. If it wasn’t the financial pain of being stripped for profit by private equity, the death knell for many rural hospitals was the state’s decision not to expand Medicaid.
The Sheps Center of the University of North Carolina has tracked 131 rural hospital closures between 2010 and 2020. Most, although not all, are in Southern areas. A 2016 study of closures among rural, financially distressed hospitals found that they were located in disproportionately minority communities with a higher rate of unemployment. Maybe unsurprisingly, the lost hospitals of the 2010-2020 period disproportionately impacted Black and Hispanic Southerners.
On one hand, the phenomenon of rural hospital closure can be viewed as the obvious outcome of declining rural populations and a redistribution of health care services to non-hospital settings. But while the shift away from hospital-based care is likely a positive in the long term, the closure of hospitals causes immediate pain in rural communities and is rarely backed up by the new forms of care that are supposed to take the place of rural hospitals. This is especially acute when we consider that the rural hospitals are not only the major source of local health care but also a major source of local employment.
The pandemic both accelerated this status quo and exacerbated it. All rural hospitals might not be necessary long term, but all rural providers are. The pandemic is forcing the shutdown of medical providers regardless of how essential they are to the community.
The simultaneous cost of preparing for an influx of COVID patients and the loss of typical patient revenue acted “like a knife cutting into a hospital's blood supply,” Ge Bai, associate professor at Johns Hopkins’ School of Public Health, said to a reporter. Although the federal government appropriated some money for struggling providers, the initial rounds of funds went to systems that were larger and had consultants ready to jump through bureaucratic hoops.
People involved in keeping independent and rural providers afloat, like Farzad Mostashari of Aledade (a health company that helps providers transition to value-based care models), were publicly frustrated. “I'm sympathetic to the fact that some large health systems are getting slammed, but they won't be the only ones that need help in the next few months,” Dr. Mostashari told CNBC in March.
Private equity and large hospital systems, meanwhile, see an investment opportunity.
Given this precarious situation, I see three possible paths forward. The first requires no action from legislators or physicians; it’s also the worst outcome. The latter two require some lift from both stakeholders and entrepreneurs deeply invested in improving the lives of underserved populations.
Do nothing: private equity takeover and eventual collapse
In Gist Weekly, a health consulting newsletter, a few weeks ago, a health system chief clinical officer noted that “[g]iven how hard independent practices have been hit, especially primary care, it seemed like a good time to strategically grow the group.” Large hospitals and private equity firms have begun circling independent providers, hoping to buy them up at bargain prices.
At first glance, these developments don’t seem terrible. Rural providers suffered as a result of the pandemic, and purchase by private equity or a larger hospital system provides a way to stay afloat. But these types of ownership are often bad for the physician and even worse for the patient.
In a recent Bloomberg Businessweek story, reporters tracked the effects of private equity ownership on a dermatology network based in California. When the pandemic hit, the owners lobbied member doctors to stay open, even continuing to provide Botox, to meet the bottom line. And although the private equity owners ostensibly weren’t involved in patient care, they may as well have been. They pushed doctors to prescribe and diagnose more, leading to such absurd diagnoses as “pre-pre-pre-cancer.”
During the videoconference, Morganroth argued that offering Botox in a pandemic wasn’t so different from a grocery store allowing customers to buy candy alongside staples.
“If I had a food supply company and had to stay open, and I had meat, bread, and milk, would I stop making lime and strawberry licorice?” Morganroth asked. “I would make everything and go forward.”
From a public-health point of view, some of the doctors believed, this was questionable.
Private equity also drives up health care costs; a study released this week estimates that hospitals owned by private equity charge almost 30% more than hospitals that aren’t.
And for physicians, working for a hospital can also be onerous. While there are certainly positive symbiotic relationships between some hospitals and provider practices, hospitals generally push provider prices higher with little increase in quality.
Providers, meanwhile, lose the ability to direct their own practice. They have to turn over decisions on everything from patient volume to the electronic health record software they use to the parent hospital. Physicians are suffering burn-out in historic numbers, and bureaucracy and a loss of autonomy are key reasons behind this phenomenon.
The longer term effects of a private equity takeover of rural physician practices are also bad. Private equity is historically bad at stewardship; the goal is to strip out valuable parts, not maintain the best parts of independent practices. Private equity firms would likely to rip out any value they can find from rural care and leave a shell, worse than before, behind.
Slow collapse continues, but CMS, and maybe some localized innovation, mitigate the pain
This month, CMS released a new payment model targeted at rural health care. The rule allows upfront payments that can act as seed funding for novel models of rural health care provision. Although the outcomes remain to be seen—CMS will choose 15 organizations as part of the pilot, and then we wait for the results—this is the best new hope for rural health in a while.
However, unless this CMS payment model is backed up by new funding for rural providers, it’s not enough. As one analysis noted, “[u]nless federal aid from the CARES Act is expanded and extended, many rural providers won't be in operation once the model actually launches.”
States use policy levers available to them to shore up multiple sides of rural care
One of the most frustrating aspects of the slow expansion of Medicaid is that many states’ residents want it. Ballot initiatives in original non-expansion states have expanded Medicaid to six new states. Missouri, this month, was the most recent. Expanding Medicaid, or at least placing it on the ballot in every state, could go part of the way towards securing the future of rural health.
Washington State is innovating with another policy lever that other states would benefit from; the recently passed law requires hospitals and providers to report all mergers and acquisitions to the state attorney general. Right now, in most states, health care acquisitions need to be reported only if they exceed a certain size threshold. Because many health care acquisitions are relatively small, they often don’t meet this threshold, and state regulators might not realize how much consolidation is happening.
Finally, states can and should ban private equity ownership of health care entities. Corporate ownership of health care practices has long been discouraged or prohibited, but lawyers have recently developed a way to get around this. According to Bloomberg Businessweek:
Yet over the past decade, lawyers devised a structure that allows investors to buy a medical practice without technically owning it: the MSO, or management service organization. Today, when an investment firm buys a doctor’s office, what it’s actually buying are the office’s “nonclinical” assets. In theory, physicians control all medical decisions and agree to pay a management fee to a newly created company, which handles administrative tasks such as billing and marketing.
In practice, though, investors expect some influence over medical decision-making, which, after all, is connected to profits. “When we partner with you, it’s a marriage,” said Matt Jameson, a managing director at BlueMountain Capital[.]
Outright bans of these MSOs are one possible solution. Sachin Jain, a physician and health care executive, has proposed self-regulation and ethical restrictions on private equity ownership of health practices. While I’m not opposed to private equity self-regulation—they should feel ethically culpable for nonsense like pre-pre-pre cancer—that’s not an adequate system.
These paths aren’t exhaustive. If we woke up in 2021 and had universal health coverage, most of this would be irrelevant. But the chances of that are slim, and the looming collapse of rural health providers is an almost-certainty.
Ultimately, the survival of rural health—and these rural communities—is about states wielding power to combat the mini-fiefdoms private equity firms are trying to construct. By not reining in private equity and large hospital systems, states are ceding care of their most vulnerable populations to distantly located CEOs who are convinced they answer to no higher power than their stakeholders.
“A small community is only as healthy as its hospital,” read a sign in front of the hospital profiled in the Washington Post. Private equity and COVID-19 have made both very, very sick, and this isn’t an illness that will pass on its own.