Does the Conversion of Critical Access Hospitals into Freestanding Emergency Departments Represent a Financially Viable Way to Maintain Rural Access to Emergency Care?

posted in: Issue #2 | 2

Written by:    John Dayton, MD, FACEP, FAAEM

                       Henry Higgins, MD



When compared to urban centers, rural communities struggle with increased health problems, lower average income, and less physician coverage. These factors combine to make the financial viability of rural hospitals a tenuous situation. These hospitals continue to close despite receiving federal assistance from the Critical Access Hospital (CAH) program and through Medicaid expansion associated with the Affordable Care Act. The goals of retaining both local emergency care and a financially stable health care facility may be met by converting CAHs into Freestanding Emergency Departments (FSEDs). Unique business models employed by academic institutions, hospital corporations, and independent emergency centers that operate FSEDs could be used to face challenges that have caused rural hospitals to close.


The Rural Reimbursement Situation

There is a disparity in the quality of healthcare provided in rural areas. The Centers for Disease Control and Prevention documented that health care in rural areas ranked lowest in 21 of 23 population health indicators. For example, rural patients tend to have higher infant mortality, heart disease, COPD, accidents, and death from those accidents. They also tend to have higher rates of poverty, obesity, tobacco use, and physical inactivity. Despite these challenges, rural areas also have fewer physicians and fewer patients with commercial insurance coverage.1 The disparity of physician coverage is illustrated in the graphic below.2

 Emergency Care



Although 25% of our nation lives in rural areas, less than 9% of physicians practice there. Among those physicians who do, the majority are primary care providers, making access to specialty care less common.3 Rural residents are also less likely to have employer-based insurance coverage and are more likely to be covered through Medicare and Medicaid. When compared to metropolitan communities, Medicare reimbursement for rural health care is also lower.4 As a result; over 470 rural hospitals have closed in the past 25 years, further impeding rural access to healthcare.5

Our country’s medical delivery system has had a difficult time funding high quality healthcare in rural areas. Compared with urban health centers, rural health facilities typically see fewer patients and receive significantly less funding for the care they provide. As noted above, many rural patients are also uninsured or carry lower-reimbursing Medicare and Medicaid. These factors place the financial viability of many of these facilities near insolvency. Many rural hospitals have had to seek the financial support from the federal government, private grants, or larger urban-based health systems in order to stay open. When they are unable to do so, access to emergency care becomes a matter of life and death.


The Creation of the Critical Access Hospital Program

As health care funding decreased in the 1990’s, many hospitals began to have difficulty remaining financially solvent, and rural hospitals were disproportionately affected. The federal government addressed this issue as part of the Balanced Budget Act of 19976. The overall goal of the legislation was to balance the federal budget by 2002. This legislation also included financial assistance for rural communities to retain critical access to healthcare. As part of the Act, the “Critical Access Hospital” (CAH) designation was created and assistance was given to hospitals that met the following criteria7:

  • Location in a state that has a State Medicare Rural Hospital Flexibility (FLEX) Program
  • Location in a rural area
  • Location either more than 35 miles from the nearest hospital or 15 miles away in areas with mountainous terrain or only secondary roads
  • No more than 25 inpatient beds
  • Availability of emergency care 24 hours a day and 7 days a week

Initially, the CAH program succeeded in allowing the network of rural hospitals to stay open. In addition to the above criteria, the legislation also allowed states to designate additional hospitals as “necessary providers” and qualify for CAH designation. The intent of this classification was to allow impoverished community hospitals to retain their hospitals when they failed to meet all of the CAH criteria8. The “necessary provider” designation was meant to be the exception, but because of frequent use, legislation was amended in 2005 to remove the “necessary provider” d!esignation.

The designation of CAH assisted rural hospitals by providing a higher than average reimbursement for Medicare services. Although Frakt cautions against using numbers provided by the hospital industry9, the American Hospital Association notes that in 2008, Medicare payments covered 91%, and Medicaid payments covered 89%, of the actual cost involved in providing health care (see graphic below)10. This coverage pattern forces hospitals to rely on reimbursement provided by patients with commercial insurance to make up the deficit in funding. To assist Critical Access Hospitals, who treat fewer commercially-insured patients, Medicare provides reimbursement at 101% of treatment costs, instead of the traditional lower rate11. This 1% surplus is then used by the CAHs for operation costs.


     Hospital Payment-to-Cost Rations for Private Payers, Medicare and Medicaid, 1988 – 2008


As of June 30, 2014, there were 1,326 CAHs, accounting for one in four acute care hospitals in the United States. However, a recent study by the Office of the Inspector General (OIG) revealed that almost two-thirds of current CAHs would not meet CAH re-enrollment requirements, had they not been either been grandfathered or designated under the “necessary provider” loophole. The report showed that 849 CAHs would not meet location and/or distance requirements. In fact, the OIG report showed that 71 CAHs were located less than 10 miles from the nearest hospital.12

In 2011, 8.5 billion Medicare dollars were spent on 2 million rural patients treated at CAHs.13 President Obama recommended decreasing Medicare reimbursement for CAHs from 101% to 100%14, and the OIG report estimated that if this was done, the savings over 10 years could be $1.4 billion dollars. However, critics contend that this 1% also determines whether or not CAHs remain financially viable.15 In fact, while 28% of CAHs currently operate in the red, this 1% change in reimbursement would increase that number to 44%.16


Closure of Critical Access Hospitals 

Even before these decisions are made, rural hospitals in the south are already closing and recent news articles have focused on how the closure has affected the health care of the population.17 Five rural hospitals, each serving populations of around 10,000, have closed in Georgia since 2012. Patients who had been served by the closed hospital now have a greater distance to travel for emergency care. The increased travel time can be associated with increased mortality. A recent USA Today article quotes a coroner from Stewart County, Georgia, where a rural hospital was recently closed. He believes that three recent deaths (2 heart attacks and 1 stabbing) may have been prevented if the patients had experienced their emergencies closer to an Emergency Department.

Mayor O’Neal, from Belhaven, North Carolina, highlighted this problem with a march to Washington, DC. Six days after Belhaven’s rural hospital closed, a 48 year-old woman died from a heart attack while waiting for transport to the nearest Emergency Department. O’Neal noted that the patient “spent her last hour in the back of a paramedic’s ambulance instead of spending [time] in an emergency room with a trained ER physician.”18 He blamed both North Carolina state officials, for not expanding Medicaid, and Vidant Health corporation, for acquiring and then closing Pungo Hospital. Vidant Health maintains they are committed to health care in Pungo and would like to build a 24-hour multispecialty facility, with a helipad to arrange transport for critically ill patients, but the town of Belhaven revoked a previously-issued building permit.

Many communities with rural hospitals are currently reaching out to local, state and federal governments for support and are creating unique solutions. Many rural hospitals have joined large healthcare networks and receive assistance from Medicaid expansion associated with the ACA. Some contend that Medicaid expansion would help states like North Carolina and Georgia, that haven’t expanded Medicaid. However, others note that rural hospitals are still closing in states like Kentucky, despite having expanded Medicaid. Some rural hospitals are changing how they deliver care, converting to urgent cares, multispecialty offices, and nursing homes.


Is Converting to a Freestanding Emergency Department a Viable Option?

Freestanding Emergency Departments (FSEDs) may represent a viable option to insure an emergency care safety net. In Georgia, lawmakers have recently proposed a way for their failing Critical Access Hospitals to become FSEDs. In 2012, the state legislature voted against allowing licensure for independent FSEDs.  However, in 2013, after 4 of Georgia’s CAHs closed, Governor Nathan Deal proposed that failing CAHs could limit inpatient services and maintain their hospital licenses, allowing them to reopen as FSEDs as long as they met the following criteria:

  • Operate 7 days a week, 24 hours a day
  • Treat all patients regardless of insurance status
  • Ban facility fees
  • Have plan in place to transfer any patient requiring inpatient care
  • Be located in a rural county, but cannot be more than 35 miles from full-service hospital


While there are plenty of critics for this plan, Jeff Hoffman, from Kurt Salmon consulting firm, emphasizes that instead of small communities focusing on the need for a hospital with inpatient beds, they should shift their focus to “local access to emergency care, to diagnostic and treatment care, and …access to specialists through some linkage.”19

Any entity that takes the place of a failing CAH needs to be financially viable. EMTALA legislation, crafted in response to patient dumping, and espousing ethics that all deserve emergency care, also creates an impediment to converting CAHs to FSEDs. Because Emergency Departments (EDs) provide care to all, regardless of ability to pay, many EDs lose money, depending on the demographics of the patients they treat. Unfortunately, those demographics most likely to make an emergency department non-viable are pronounced in the same rural areas where CAHs are closing. Often hospitals subsidize loss from the Emergency Department with money from inpatient admission and surgeries.

So how do you provide local emergency care and still stay financially viable? To do this, FSEDs in underserved areas will need to combine emergency care with revenue generating medical care. Academic institutions, hospital corporations, and independent freestanding emergency centers all currently own and staff FSED, and each brings a unique business structure that may enable them to meet that challenge.


Unique Opportunities for Cost Savings and Loss Offsets related to Business Structure


●        FSED can be staffed by Advanced Care Practitioners (Physician Assistants and Nurse Practitioners), Fellows and             Residents, under the supervision of a physician

●        FSED can function as a training site for multiple professionals at different levels of their training: Advanced                   Certification training for Advanced Care Practitioners, Rural Medicine Fellowship, and as a Rural Medicine medical           school and residency rotation

●        FSED can utilize Telemedicine, linked to the main hospital, to guide stroke, psychiatric, and other specialty care             and to direct patient disposition planning

●        FSED can obtain imaging reads from off-site Radiology services

●        FSED can function as satellite center for inpatient admissions

●        FSED can be combined with Primary Care and/or Specialty offices and associated services that act as referral                 center to the main Institution


●        FSED can function as satellite center for inpatient admissions

●        FSED can be combined with Primary Care and/or Specialty offices and associated services that act as referral                 center to the main Institution FSED

●        FSED can be staffed by Advanced Care Practitioners

●        FSED can utilize Telemedicine, linked to main hospital, to guide stroke, psychiatric, and other specialty care, and           to direct patient disposition

●        FSED can obtain imaging reads from off-site Radiology services



●        FSED business model is already built to be lean and independent from associated inpatient institutions and can             continue to evolve accordingly.

●        Utilization of the hybrid model, involving combining services with Urgent Care, Occupational Health, and/or                   Primary Care offices/services.

●        CMS recognition would allow Independent FSEDs to treat Medicare and Medicaid patients and receive                           comparable reimbursement rates

●        Creative business models and negotiation with state government groups to allow licensure of FSEDs in metro               areas as well if they are willing to convert failing CAHs to FSEDs

Independent FSEDs, however, face an uphill battle because CMS does not currently allow for licensure of independent FSEDs or reimburse for care the same way they reimburse FSEDs owned by academic institutions and hospital corporations. Independent FSED will need CMS recognition, in addition to other creative business solutions, to be able to offer emergency care to rural communities.For academic hospitals and large hospital corporations, FSEDs could generate revenue via downstream hospitalizations and increase the catchment area for the parent hospitals.

Hybrid-models, satellite centers, creative business arrangements, and new licensing agreements could represent future operating models for FSEDs. Hybrid models would share the use of an on-site laboratory and imaging equipment to save costs. Even when losing the revenue brought through inpatient care and surgeries, the same outpatient and emergency services could be provided in a leaner way than was provided by the CAHs.

In addition to innovative business models, federal funds could also be made available to help finance this process. To convert CAHs to FSEDs, funds originally designated for CAHs, 101% Medicare reimbursement, and part of the 35 million dollars included with the reauthorization of the Medicare Rural Hospital Flexibility (FLEX) Program grants could be used.20



The viability of a traditional hospital is difficult in rural communities due to a number of demographic and financial factors. Despite federal assistance, many of these institutions are failing. In order for a rural community to retain local emergency care, new solutions are needed. The Freestanding Emergency Department model could replace the CAH. For this to happen, a rural hospital would give up inpatient beds, but would keep local emergency care and be able to connect patients to nearby specialty and inpatient treatment.


1 Eberhardt MS, Ingram DD, Makuc DM, et al. Health United States 2001. Urban and Rural Health Chartbook. Hyattsville, Md: National Center for Health Statistics; 2001.

2 Used with permission from Avalere Health, LLC

3 Gamm, Larry, et al. (2003). Rural Healthy People 2010: A Companion Document to Healthy People 2010. p.46. Retrieved August 27, 2014 from


5 “Eye on Health” by the Rural Wisconsin Health Cooperative, from an article entitled “Rural Health Can Lead the Way,” by former NRHA President, Tim Size; Executive Director of the Rural Wisconsin Health Cooperative

6 Civic Impulse. (2014). H.R. 2015 — 105th Congress: Balanced Budget Act of 1997. Retrieved from https://



9 Frakt, A. (2011). How Much Do Hospitals Cost Shift? A Review of the Evidence. The Milbank Quarterly, 89(1), 30-130.

10 Used with permission from Avalere Health, LLC

11 Social Security Act, §§ 1814(l) and 1834(g), 42 U.S.C. §§ 1395f(l) and 1395m(g). 



14 Office of Management and Budget, Living Within Our Means and Investing in the Future: The President’s Plan for Economic Growth and Deficit Reduction, September 2011. Accessed at ? on ?

15 Carlson, J. (2013, August 17). Critical debate: Proposal to strip critical-access status from two-thirds of those hospitals called a death knell for many. Modern Healthcare. Retrieved from article/20130817/MAGAZINE/308179942

16 Homles, G. et al. (2013). The Financial Performance of Rural Hospitals and Implications for Elimination of the Critical Access Hospital Program. The Journal of Rural Health, 29(2), 140-149.

17 O’Donnell, J., & Ungar, L. (2014, November 12). Rural hospitals in critical condition. USA Today. Retrieved November 16, 2014, from federal-reimbursement-medicaid-aca/18532471/

18 GOP mayor marches to D.C. in support of Medicaid [Video file]. (2014, July 7). Retrieved from

19 Herman, B. (2014, September 27). When the tiny hospital can’t survive: Free-standing EDs with primary care seen as new rural model. Modern Healthcare. Retrieved from


2 Responses

  1. It looks like this idea is gaining national attention. Dr. Gupta mentions this in the MedPage article:

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