What Hath Washington Wrought?
The Impact of Health Care Reform in Rural California

by Sheldon Weisgrau

President Clinton's signature on the Balanced Budget Act of 1997 represented the culmination of a bi-partisan legislative effort to cut spending and balance the federal budget by 2002. To achieve meaningful spending reductions, the President and the Congress naturally looked at reforming Medicare and Medicaid, the huge government programs that pay for health care services for the elderly, the disabled, and the poor (in California, the Medicaid program is known as “Medi-Cal”). The Balanced Budget Act seeks to achieve savings in federal health care spending of $130 billion over the next five years by setting in motion a far-reaching plan to change the way the nation's health care services are financed and delivered. These changes will substantially impact the 2.7 million Californians that reside in rural/non-metropolitan areas of the state and the health care providers that serve them.

Over the past five years, the expansion of managed care has been the most visible health system change seen in California and across the country. Managed care penetration in rural areas, however, has been limited for a number of reasons, including low population density, provider shortages, and low Medicare payment. In addition, rural providers have largely been able to avoid the expansionist pressures of the commercial managed care market taking place in other parts of the state by relying on the traditional fee-for-service payment system and special safety net programs, such as federally qualified health centers (FQHCs), rural health clinics (RHCs), and distinct-part skilled nursing facilities (DP-SNFs).

The reforms contained in the Balanced Budget Act, however, will change the rules of the game for these rural providers. This legislation, while designed to slow the growth of Medicare and Medicaid expenditures, creates broad opportunities for the development of expanded health plan options for beneficiaries and will expedite the growth of various forms of managed care in rural areas. At the same time, many of the programs and protections extended to traditional safety net providers will be eliminated or gradually phased out. The impact of these changes on rural communities and providers will depend greatly on the response of each community in part and as a whole to the challenges and opportunities created by the legislation. It is imperative that Community Health Council members from each DRIS Initiative site understand the potential impact of these health care financing changes as they evaluate their own community's health care system. What opportunities exist for integrating providers in a network to take advantage of these changes and preserve the local rural health care system.

Some of the most important effects of the Balanced Budget Act on rural communities are:

The ability of small rural providers to use Medicare and Medi-Cal to cross-subsidize care to uninsured and underinsured populations is further limited.

Health care providers have traditionally used revenue from insured patients to pay for the care of those that are uninsured or have limited ability to pay for health care services. In rural areas, where Medicare and Medi-Cal are the chief payors and rich commercial plans are not predominant, providers have traditionally cross-subsidized care to uninsured populations from an already squeezed public dollar. Tightening of payments to rural providers, through such measures as caps on RHC and FQHC payments, creates serious threats to the rural provider's ability to provide services to the entire community.

Accountability is transferred from the Medicare program and providers to beneficiaries.

Providers have traditionally been viewed as responsible for the services they provide to their patients. This responsibility has been enforced by a variety of mechanisms, such as utilization review incentives and scrutiny of quality of care by outside organizations. Likewise, the Medicare program has historically played a comprehensive regulatory role in ensuring that providers meet certain standards of care. Beneficiaries have had little say and little responsibility for the types of services provided or the way that these services were delivered or paid for. Until the mid-1980s, fee-for-service medicine was the only option available through the Medicare program and even now, fewer than 15 percent of Medicare beneficiaries nationwide are enrolled in managed care plans. Even in California, which has the highest Medicare managed care penetration in the country, only 38 percent of Medicare beneficiaries are enrolled in managed care plans, and the vast majority of these beneficiaries reside in urban areas.

Under Medicare reform, beneficiaries will be able to take responsibility and exercise accountability for their health care in unprecedented ways. Through expansion of the types of health plans available and incentives for development of these plans, Medicare beneficiaries will have the choice of opting out of the traditional Medicare program and enrolling in a number of alternative models, such as preferred provider organizations (PPOs -- fee-for-service plans with incentives to use network providers) and provider-sponsored organizations (PSOs -- closed networks operated by providers). These options, along with point-of-service (POS) plans, which have been permitted in Medicare for about a year, will offer increasing competition to fee-for-service providers and traditional health maintenance organizations (HMOs). Ironically, as a result of these expanded choices, providers will have to become more cognizant of issues such as patient satisfaction, managing the cost of delivering care including participation in more extensive utilization review activities.

The “playing field” between rural and urban providers is leveled and the medical model of care is reinforced.

Although rural providers have historically been paid less than their urban counterparts, the need to support rural safety net providers has also been recognized in public policy. As a result, a number of programs were established twenty years ago to offer grants, increased reimbursement, and other types of support to providers that serve rural and underserved populations and to enhance the ability of these providers to offer a comprehensive set of services to their communities. RHCs and FQHCs, for example, are able to provide a broad range of services through incentives such as cost-based reimbursement and bundled per-visit payments that include diagnostic services, treatment services, and social services.

The Balanced Budget Act, however, seeks to reduce federal outlays by “leveling the playing field” and cutting special provider payments and programs. As a result, rural and other safety net providers will be paid in a manner similar to their urban counterparts. So, for example, disproportionate share hospital payments (DSH -- extra payments to hospitals that treat a majority of Medicare and Medicaid patients) will be substantially slashed. Through tightening of RHC eligibility and payment and phase out of cost-based Medicaid reimbursement for FQHCs, these providers will be paid more like other ambulatory care providers, but their ability to offer a comprehensive set of services is diminished. As a result, the legislation tends to erode these broad community-oriented models of care and reinforce the traditional medical model.

This leveling of the playing field takes a different form in terms of third party payment to managed care plans. In this case, the field between urban and rural is leveled by closing a portion of the gap in payments to Medicare managed care organizations for urban and rural enrollees by increasing payments in rural areas and reducing the rate of growth in urban areas (in California, this gap in payments ranges from a low of $380 per member per month in Fresno County to a high of $635 in Los Angeles County). This represents a potential opportunity for rural providers. However, there are no provisions in the law that encourage the development of locally owned networks or rural-based managed care plans. As a result, a likely effect of these increased payments will be more aggressive expansion of urban-based managed care plans to rural markets, accelerating the outflow of health care and other dollars from rural areas, unless rural communities and providers can quickly organize themselves to counteract these measures.

The importance of building rural network relationships is heightened.

Relationships between providers, for patient referral and transfer, exchange of information, etc., have long been important in the health care system. In the current fee-for-service dominated system in rural areas, these relationships traditionally have been built provider-by-provider, through actions such as hospital-hospital networking and the acquisition of physician practices by hospitals. In urban areas, competitive and acquisitory relationships have dominated, where an oversupply of providers and resources leads to fierce competition for the health care dollar between providers, health systems, and insurers. This hyper-competitive model, however, may not effectively serve the interests of rural communities.

Rural communities are generally characterized not by oversupply, but by shortages of providers and resources. Although competitive relationships, particularly between hospitals and between hospitals and physicians, are not uncommon, the ability of managed care organizations to selectively contract with certain providers and use volume-based leverage to drive down prices is limited. As a result, in cases where urban-based plans are successful at enrolling rural residents, they may attempt to bypass local providers and steer patients to urban centers for care. In these cases, the viability of rural providers and the economic health of rural communities is threatened. A relationship building model that includes community involvement and is based on strong community-provider linkages may therefore be more appropriate for rural communities interested in preserving local access to care and local capital and resources.

Conclusion

Medicare reform substantially increases the stakes involved in developing such systems as well as shifting the focus of system development from solely provider-sponsored efforts to efforts that are sponsored and developed by rural communities themselves. The creation of community-oriented models necessitates community partnerships across multiple sectors of the economy and consumer base which are community-provider alliances, rather than provider-provider relationships. Programs that support such relationships, such as the “DRIS” initiative, therefore, are particularly relevant to California's rural communities in the current market environment.