A Delicate Balance: The Economics of Rural Health Care Delivery | JAMA | JAMA Network
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January 2, 2002

A Delicate Balance: The Economics of Rural Health Care Delivery

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JAMA. 2002;287(1):110. doi:10.1001/jama.287.1.110-JMS0102-4-1

Rural health care delivery systems, embodied in the spirit of the men and women who still farm and work the rural landscape, are often described by their tenacity and ability to deliver quality in the face of economic uncertainty. Many rural hospitals have closed, restructured, or consolidated in the last 2 decades due to government funding cuts, as well as the Congressional policies set forth in the Medicare Prospective Payment System (PPS) of 1983 and the 1997 Balanced Budget Act.1 The low population densities in rural areas often result in decreased patient volumes and diseconomies of scale, fixed overhead expenses, high percentages of subsidized and uninsured patients,1 disproportionately elderly populations,2 physician shortages, and decreased access for low-income patients.1

Congress, the administration, and special interest groups define health care reimbursement policy. Given that 80% of Americans live in nonrural areas, the priorities of urban and suburban populations are often disproportionately represented to Congress through representation and lobbying efforts. Insurance and pharmaceutical companies, health plans, hospitals, and physicians associations have rural constituents; however, these entities rarely advocate for rural interests.1 In this environment, when faced with demands to control costs, Congress' cost containment policies often result in standardized packages—a "one size fits all" approach.

An example of this methodology is demonstrated in Medicare hospital reimbursement policy. The Medicare PPS pays hospitals a fixed amount per diagnosis related group (DRG) for each Medicare patient. Approximately 70% of the payment rate is modified by an area wage index3 that is intended to reflect differences in hospital wages. The calculation of this index is disadvantageous for some rural providers because there is a single index for all rural counties in a given state. In states such as Texas and Illinois, areas defined as "rural," are too large and too heterogeneous for the index to be meaningful. A west Texan frontier county, for example, may have markedly different demographics and health care needs compared to a rural population 70 miles from Austin. By contrast, each metropolitan or urban area within a state has its own separate index.

The index also reflects labor costs that are already accounted for in the DRG, which, in effect, pays urban hospitals that treat more complex cases twice for the same service. Because urban hospitals, on average, treat a mix of patients with more highly paying DRGs, they receive double payment for their labor costs. In effect, they have a wage index that is approximately 15% higher than rural hospitals and they have a case mix index that yields approximately 5% to 10% greater payments based on labor intensity. Finally, the labor market boundaries, as they are currently drawn, allow too much variation in wage scales and therefore oversimplify the demands in rural labor markets.3

Rural physician income is also affected by differences in policy and patient demographics. Rural patients are more likely to be self-employed or to lack health insurance1 and rural states often have stricter Medicaid eligibility standards and higher proportions of low-income families. Each of these factors has the potential to lower average incomes for rural physicians. While rural physicians have the same costs as urban physicians for salaries, supplies, and transportation, they cannot take advantage of economies of scale that spread those costs over a large number of patients.

Rural emergency medical service (EMS) provides another example of structure affecting function. The purchase and operating costs to run a competent EMS are often the responsibility of a rural hospital system or the local government. Many rural EMSs cannot pay for themselves and rely on private donations, charity events, and even the occasional bake sale. Emergency medical personnel in a rural community are usually all volunteer, and emergency care is their second job.1 While the majority of rural EMS calls are nonemergent facility-to-facility transports, rural EMS must also provide advanced life support to transport trauma, cardiac, and perinatal patients to tertiary care centers. A rural community with a service district of 500 square miles and 1200 calls per year has nearly twice the cost-per-transport as its urban counterpart.4 Although the costs to purchase and operate an ambulance are the same for urban and rural EMS, urban EMS are reimbursed by private payers at a higher rate and Medicare accounts for less of their income.4

Inequities in reimbursement policies make it more difficult for rural providers to maintain fragile systems of care for subsidized and uninsured patients. Congress has delayed the implementation of the proposed reimbursement changes called for in BBA97 for home health and other outpatient services. In the past, Congress has had a pattern of passing budget restrictions to reduce cost and then making minor changes to limit harm to rural providers, but this does not provide a comprehensive policy to stabilize rural health care services.

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Mohr  PECheng  CMMueller  CD Establishing a Fair Medicare Reimbursement for Low-Volume Rural Ambulance Providers.  Bethesda, Md Project Hope/Walsh Center for Rural Health Analysis July2001;