Healthcare Economics Of Critical Access Hospitals Term Paper

Length: 8 pages Sources: 4 Type: Term Paper Paper: #86527106 Related Topics: Fixed Costs, Healthcare Services, Medicare, Healthcare Quality Published November 04, 2022
Excerpt from Term Paper :


This weeks written assignment sought to identify what critical access hospitals (CAH) are, whether or not they are profitable, barriers to their profitability, and possible alternatives to CAHs. CAHs came into existence following the passage of the 1997 Balanced Budget Act (BBA) with the primary aim of increasing access to care in rural communities. Their distinguishing feature is the use of the cost-based Medicare reimbursement system as opposed to the traditional prospective payment system. The cost-based reimbursement system is where Medicare reimburses hospitals based on costs rather than at a standard flat rate. The subsequent sections of this text demonstrate that CAHs are not operating profitably despite running under the cost-based system. Most of them are operating inefficiently, incurring high costs for serving a relatively small number of patients. This text provides possible reasons for the high costs that characterize CAH and recommends the adoption of community outpatient hospitals as a possible alternative.

Transforming Critical Access Hospitals into Profitable Organizations

Introduction of Topics and Facts as Presented in the Case

This written assignment focused on critical access hospitals (CAH), their costs, and strategies for increasing their profitability. More specifically, the assignment explains what critical access hospitals are, whether or not they are profitable, barriers to their profitability, and possible alternatives to CAHs. CAHs came into existence following the passage of the 1997 Balanced Budget Act (BBA). The Act sought to protect citizens in the rural areas by increasing access to healthcare services. With the passage of the Act, rural hospitals could transform into CAHs, which are characterized by the cost-based Medicare reimbursement as opposed to the Prospective Payment System that sets a standard amount of Medicare reimbursement independent of costs. As per the provisions of the BBA, CAHs have the following fundamental features: they are located in non-metropolitan areas, are non-profit nature, are located at least35 miles away from the next nearest general hospital, have a maximum of 25 beds, and limit patients hospital stays to not more than 96 hours.

Sources contend that CAHs are typically not profitable. The immediate effect of conversion was an increase in profitability and improvement in liquidity. However, the operational costs of CAHs have continued to increase, resulting in low margins. Despite using the cost-based system, CAH margins have been low. This is because not all costs are eligible for coverage under the Medicare cost-based system, the only costs eligible for reimbursement are those that relate to Medicare patients, the amount that Medicare reimburses is reduced by the cost-sharing amount the customer covers, and Medicare reimbursement rates have reduced due to sequestration rules. The text hypothesizes that CAHs have high costs because the low patient numbers and few services limit the realization of cost savings due to economies of scale and economies of scope. To minimize costs, the text proposes the adoption of community outpatient hospitals as an alternative to CAHs. These would be structured to serve a larger number of outpatients, without offering inpatient care, which would ensure they serve more patients at a relatively lower cost.

A Summary of the Areas Pertinent to the Course

The case of critical access hospitals profitability demonstrates several fundamental concepts covered in the course. The first is the idea of average costs, and inefficiency as presented in chapter 5. In chapter 5, Lee (2019) identifies the different categories of costs, including average costs, the per-case cost obtained by dividing total costs with the level of output. Firms which produce in large quantities are able to enjoy economies of scale and scope from being able to spread their fixed costs over a large and wide product base respectively (Lee, 2019). An example of economies of scale is when a large pharmacy uses the same dispensing machine to serve a larger number of prescriptions. The cost of maintaining and servicing the machine are spread out across a wide product base, resulting in lower per-capita costs (Lee, 2019). The concept of average costs and economies of scale and scope are used in the case to explain why critical access hospitals charge higher healthcare costs than other hospitals (Lee, 2019).

Finally, a moral hazard occurs when one party in a contractual arrangement takes advantage of information asymmetry to benefit themselves to the detriment of the other party (Lee, 2019). The party engaging in the moral hazard enjoys protection and the burden of their actions will be borne by the other party (Lee, 2019). For instance, an insured person engages in a moral hazard if they fail to take proper action to prevent a hazard from occurring because the insurer will bear the burden of loss. The moral hazard concept could come in handy in explaining why critical access hospitals served by the cost-based Medicare system have high costs despite serving low patient numbers.

A Detailed Case Discussion

What is a critical access hospital?

Most hospitals in rural areas were unable to cover their operation costs under Medicares Prospective Payment System (PPS) and had to close down (Li, Schneider & Ward, 2009). Li et al. (2009) state that between 1990 and 1997 alone, approximately 150 hospitals closed down due to rising costs and declining revenues. To ensure that…Commission Performance Measure Program (Joynt et al., 2011). The effect is that there is little data for ascertaining the quality of care offered at these facilities as there is no means to compare their data to national data (Joynt et al., 2011). Furthermore, critical access hospitals have fewer healthcare providers and specialists in their communities than hospitals located in metropolitan areas (Joynt et al., 2011). This, coupled with less access to capital, makes it challenging for critical care hospitals to deliver quality care (Joynt et al., 2011).

3b) Explore why critical access hospitals have high costs

The low patient numbers imply that critical access hospitals spread their fixed costs over a small patient base, which ultimately increases per-capita costs (Lee, 2019). Moreover, critical access hospitals have fewer healthcare providers and specialists, as well as resource limitations that hinder investments in capital equipment. All these limit the hospitals ability to offer diversified healthcare services, which would result in cost savings due to economics of scope. Thus, critical access hospitals fail to enjoy both economies of scale and economies of scope (Lee, 2019).

On a different note, critical access hospitals may have high costs as a result of engaging in moral hazards. Since Medicare reimburses these facilities on a cost basis, there is a possibility that the facilities could incur unnecessary costs just because these are eligible for reimbursement by Medicare.

What are the alternatives to critical access hospitals?

The Save Rural Hospitals Act introduced in 2015 identifies community outpatient hospitals as an alternative to critical access hospitals (Cai, 2017). Under the proposal, community outpatient hospitals would operate a 24-hour, 7-day-a-week emergency room, coupled with primary care and outpatient services (Cai, 2017). To keep costs at a minimum, community outpatient hospitals will not have inpatient beds, but will have agreements with other facilities to transfer patients requiring higher levels of care (Cai, 2017). However, there is limited research on the considerations, impact, and constraints posed by this alternative (Cai, 2017).


In conclusion, CAHs serve a crucial role in rural areas by ensuring that rural communities have access to healthcare services. However, they are highly inefficient as indicated by their high costs vis--vis the small number of patients served. In this regard, this text recommends that CAHs are replaced by community outpatient hospitals, which will serve more patients at relatively lower costs. Three takeaways from completing this assignment are:

Inefficiencies in healthcare organizations largely result from an inability to properly manage costs

The quality of care or the publics perceptions about the quality of care are a significant determinant if patient numbers

Increasing the…

Sources Used in Documents:


Cai, H., Spreckelmeyer, K., Zilm, F., Medina, M., Sheward, H., & Sanguinetti, P. (2017). Exploring Alternatives for Critical Access Hospitals: A Research-Based Design for Rural Hospitals. Architecture of Complexity. Retrieved from

Center for Healthcare Quality and Payment Reform (2021). Strengths and Weaknesses of Cost-Based Payment. Author. Retrieved from

Flex Monitoring Team (2022). CAH Financial Indicators Report: Summary of Indicator Medians by State. Flex Monitoring Team Data Summary Report, No. 33.

Cite this Document:

"Healthcare Economics Of Critical Access Hospitals" (2022, June 23) Retrieved November 29, 2022, from

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"Healthcare Economics Of Critical Access Hospitals", 23 June 2022, Accessed.29 November. 2022,

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