Background and Introduction
In 2021, Medicare accounted for $900 billion, or 21% of U.S. healthcare spending, making it a critical revenue source for hospitals. The way Medicare reimbursements are governed is a contentious issue, particularly due to the significant impact on rural hospitals, which often receive lower payments for their services. A key factor in determining these payments is the wage index, which assesses a hospital’s labor costs relative to the average income in its surrounding area. A hospital with a wage index above 1.0 receives reimbursements higher than the national average, while one with a wage index below 1.0 receives less.
Furthermore, Medicare operates under a principle of budget neutrality, meaning any changes to its reimbursement policies must not result in increased overall spending. This requirement implies that increasing reimbursements for rural hospitals would necessitate reductions for others, deepening divisions within the healthcare community over how Medicare funds are allocated.
Rural Hospitals in the U.S. and the Save Rural Hospitals Act
In the U.S., rural hospitals serve 14% of the population, or 46 million Americans. These hospitals are often in a precarious financial situation; from 2010 to 2021, 136 rural hospitals closed either partially or fully, exacerbating the shortage of healthcare services in rural areas. Currently, an additional 600 rural hospitals are at risk of closing. A major factor contributing to this financial instability is low Medicare reimbursements coupled with a scarcity of patients who have private insurance, which generally pays more than Medicare. The core issue lies in the wage index system used by Medicare, which often results in lower reimbursements for rural hospitals because they are typically located in areas with a low wage index. This discrepancy means that the cost of providing services often exceeds the reimbursements these hospitals receive, leading to financial losses.
To address this critical situation, the Save Rural Hospitals Act has been proposed. This legislation aims to adjust the wage index by setting a minimum threshold of 0.85, ensuring that even the hospitals in the poorest regions receive sufficient revenue to maintain their operations. This change could be pivotal in preventing the closure of over 200 rural hospitals in the coming years.
Increasing Medicare reimbursements to rural hospitals presents a complex challenge, particularly because Medicare operates under a budget-neutral framework. This means any increase in payments to one group must be offset by a decrease to another, making it difficult to boost funding for rural hospitals without affecting others negatively.
For instance, the Save Rural Hospitals Act proposes increasing the minimum wage index to 0.85 for rural hospitals. While this would provide much-needed support to these facilities, the funds would need to be redirected from hospitals with a wage index above one, many of which are urban hospitals that also face significant financial pressures. Urban safety net hospitals, which were severely impacted during the COVID-19 pandemic with rising expenses and financial losses, would be particularly affected.
Reallocating Medicare funds is highly contentious, especially among hospitals in wealthier areas that would stand to lose funding. Legal challenges like the case of Bridgeport Hospital et. al. v. Becerra, where hospitals successfully sued over reductions in Medicare reimbursements, illustrate the resistance to such changes. Additionally, as former Wisconsin Senator Herb Kohl pointed out, the budget neutrality of the bill means that any benefit to one state comes at the expense of another, complicating the legislative process and making it difficult to pass reforms that could help disadvantaged or rural areas without harming others. This dynamic creates a significant barrier to reforming Medicare payments in a way that equitably supports all hospitals.
