Troubled Rural Health Care: Considerations for Our Communities

Originally Published in Iowa Lawyer, October 2020

Many rural health care organizations were struggling long before this year’s coronavirus pandemic.  Nationally, 168 rural hospitals have closed since 2005, 126 of these closing since 2010.¹  In 2020, eight hospitals have closed already.²

Iowa communities have generally seen their health care organizations maintained the last several years, although many are in precarious financial condition.  Of the 118 Iowa hospitals, 44 were shown to have ended the last fiscal year with negative balances.³  According to the Guidehouse Rural Hospital Sustainability Index, 12 – 17% of Iowa’s rural hospitals are at high risk of closing without improvement in their financial situations.⁴
The role hospitals play in Iowa is immense, providing more than 78,000 jobs and last year creating nearly $8 billion in overall economic impact.⁵  Losing several Iowa hospitals would have a devastating impact on Iowa communities still consumed with a pandemic, wind storms, and drought.

Support for Rural Health Care
Through the years, rural health care influence has been recognized and supported in a number of ways.  Arguably the most significant support was provided by the United States Congress with the passage of the Balanced Budget Act of 1997 (Public Law 105-33) which included the new designation “Critical Access Hospital” (CAH).⁶

By far the greatest advantage critical access hospitals receive is cost-based reimbursement for services provided to Medicare beneficiaries.  Basically, a critical access hospital reports its costs for providing care to Medicare beneficiaries and Medicare pays them.

The CAH designation comes with its limitations such as requiring a limit of 25 beds or less, a reimbursement process that typically is finalized six to nine months after conclusion of the fiscal year, and some reduction in the cost reimbursement over the years.
For many Iowa communities, the CAH program has saved health care services with 82 Iowa hospitals gaining designation as critical access hospitals.⁷

A major indicator of rural health care provider performance is the management of state Medicaid programs.  Medicaid covers health care services for poor and disabled Iowans.

While there are many perspectives on how the $5 billion Iowa Medicaid program has been performing, it seems health care providers are receiving lower, confusing, and less timely payment from Medicaid.  Iowa followed other states in expanding coverage to more people and moving Medicaid from state administration to management by multiple companies.  Medicaid already had a history of relatively low reimbursement.

Given the situation, The Iowa Hospital Association (IHA) is proposing a way to address Medicaid performance which remains to see legislative action.⁸

The pandemic has given health care providers some temporary reprieve.  The CARES Act and the Paycheck Protection Program and Health Care Enhancement Act enacted by Congress included pandemic relief monies for them.⁹

While this emergency relief has been helpful, the CARES Act relief has covered only about half of the losses health care organizations faced in managing through the first months of the pandemic.¹⁰

Another support early in the pandemic was expansion by the Centers for Medicare & Medicaid Services (CMS) of existing rules to allow advance Medicare claims payments to health care providers.  Now, if there is no congressional action, these accelerated payments are beginning to be recouped by Medicare.¹¹

The long-term implications of the pandemic on health care organizations in Iowa will be negative.  The only unknown is the extent of damage with a mid-range estimate of $1.41 billion in revenue losses for Iowa hospitals.¹²

In any case, rural health care will remain in financial jeopardy, whatever the details and even though additional commitments and proposals at the state and federal levels have been made to address rural health care needs.¹³

Paralysis Becomes Abrupt Closure
Unfortunately, often the culture and leadership surrounding troubled rural health care organizations become paralyzed or have little influence.  It is difficult to move toward any restructuring process that might save services for the community.
Failing to act in a timely way can become a downward spiral that leaves an abrupt, unstructured closure as the only option.  For example, the owner of a chain of 21 Nebraska nursing homes suddenly failed to make payroll.  Of course, this one event negatively and unexpectedly impacted 21 Nebraska communities.¹⁴

Strategies for Troubled Healthcare Organizations
Many troubled health care organizations assume they must sell or otherwise join a larger organization to avoid closure.  While these strategies have been pursued with some success, it’s often at a price to the local community.

In a contract management arrangement, the small organization can become a minor distraction for the larger urban organization that is likely facing its own stresses.  Alternatively, services may be terminated in the small organization.¹⁵

Sometimes a management arrangement has found community hospitals unintentionally trapped in major fraud cases.  In Missouri, a critical access hospital was operated under a management contract with a company where an owner charged with billing fraud involving more than $100 million embroiled the hospital in the scheme.¹⁶

In another situation involving contract management, The United States Department of Justice reported in 2018 that Health Management Associates, LLC, would pay over $260 million to resolve fraud allegations, including false billing.  The company had been involved in management of rural health care organizations across the country.¹⁷

Regarding the sale or merger of a rural health care organization, serious consideration will likely be stymied by any large debt and/or pension burden.  Ironically, while a small health care organization is expensive to build and equip, it has limited value - its greatest value is as a going concern.

Another consideration is restructuring health care organizations financially.  This can be accomplished either outside or within the bankruptcy process.

Non-Bankruptcy Workout
The workout is used outside bankruptcy and is a negotiated modification of debt.  It typically takes the form of an out-or-court agreement between a debtor and its creditors on repayment of debts.  While a workout avoids legal procedural complications, it also lacks protections found in bankruptcy processes.

The primary goals of a workout are to stabilize financial performance and, as needed, negotiate improved debt terms with major creditors.  Lawyers experienced in bankruptcy and debtor-creditor law can advise the rural health care organizations and involved government entities on whether a non-bankruptcy workout is appropriate.

Assuming concerned creditors and/or local government overseers are involved, a detailed operational and financial plan will be needed to assure the situation will improve.

While conventional wisdom suggests smaller rural health care organizations cannot survive financially, federal government attention on rural health care does allow opportunity for many of these providers to fare reasonably well.  At the same time, improving the financial situation will likely require major change and advancing potential opportunities may be difficult and complicated.

Health care organizations, even the small ones, are complex enterprises with innumerable regulatory, accreditation, and legal requirements for every department and function.  Simply think of a laboratory technologist, a nurse, a hospital facilities manager, a physician - each implementing the ever-changing covid-19 requirements this year - to get a small sense for the myriad of patient care requirements these organizations face.

It’s easy to see how the smaller organizations can miss some financial opportunities while focusing on their most important priority – patient care.

Further, acquiring revenue for services, or billing, has become nearly as complicated as patient care.  Gone are the simple days of trading health care services for a chicken.  Also gone are the days when health care billing was a rote, mundane process.  Today, changes in billing occur constantly, challenging the industry to keep pace.

Some of the revenue opportunities for the workout plan are found in areas such as medical coding and documentation, pharmacy management, IT support for billing, insurer/payer contracts, data analytics for billing, new service  implementation, patient service growth, pre-authorization for expensive services, and collections.
Many times, there are also opportunities to reduce costs.  The following areas can be examined and adjusted fairly quickly as part of a workout plan: vendor contracts, lease agreements, accounts payable processes, and payroll processes, to name a few.

Other financial opportunities can also be assessed as part of the workout plan that take more time to implement.  These opportunities might include items  such as staff restructuring, elimination of services, refiling Medicare cost reports, and employee benefit changes.

Bankruptcy, for health care organizations particularly, is complicated.  First, important people without representation are involved, i.e., patients.  Especially in rural situations, the organization’s patients are likely to include vulnerable populations with few options for other care, and/or limited ability to acquire care elsewhere.

Thus, various state and federal entities may become involved.  In addition, the bankruptcy court typically considers the need to appoint a patient care ombudsman for the protection of patients.
While the health care organizations - cheered on and pressed by their communities - set sites on continuing to provide services, those that file for bankruptcy often do not achieve this goal.¹⁸  On the other hand, filing for bankruptcy can provide some short-term relief from creditors and provide time to develop business plans.
Prior to filing, a number of factors should be considered such as current state operating licenses, government registrations, and other regulatory matters.  Review of contracts with payers, physicians, other clinical providers, and vendors is also advisable.  This information can be used for business plan development.
In addition, health care organizations also typically have obligations to notify local, state, and federal agencies regarding the situation.

Approval of plans may be required from government agencies.  Of course, attention is needed on communications with employees and the community at large.

Finally, there is thought the needs of health care organizations are not adequately addressed in bankruptcy law.  The “misfit” issues have raised a call to create separate Bankruptcy Code subchapters for health care business bankruptcies that would provide clarity on current issues, as well as allow the development of procedures and organizing principles for health care organizations.¹⁹

Workout, Bankruptcy, Abrupt Closure?  Timing is Everything
No rural community wishes to lose the economic energy its health care organizations provide.  Losing a hospital or nursing home is similar to losing a school.  Nor do rural leaders want the damaging public relations that accompany a bankruptcy.

The counties and cities overseeing rural health care organizations need these providers to continue as going concerns.  Closing potentially leaves local taxpayers, vendors, and lenders carrying any remaining debt.

Meanwhile, rural lenders may be strapped with health care organizations failing to meet debt requirements.  While lenders are often unwilling to push hospitals into bankruptcy or closure, the drastically strained agricultural sector in Iowa may lead to different decisions about the health sector.

If the financial situation is simply ignored, it can become too late to save anything.  While going through bankruptcy is an understandable fear, failure to act resulting in abrupt closure is much worse for the community.  In the latter scenario, barriers to entry and regional competition will assure the community will never have much for health care services again.

While it is difficult to know if these bankruptcy and non-bankruptcy options will be used more frequently in health care, at least 29 hospitals have filed for bankruptcy in 2020.²⁰  Further, organizations have been saved with only a few days of cash on hand and inadequate cash to make the next payroll.

With the business planning provided by the workout and bankruptcy options, health care organizations have come from the edge of closure to seize unrealized potential, becoming sustainable for the long-term and patient care leaders in their regions.

The author, Jeanne M. Goche, MA, JD, is a long-time health care executive and member of the Iowa State Bar Association, as well as President/CEO of Solutions in Health Care Management; Phone: 319-330-0008; Email:

¹“168 Rural Hospital Closures: January 2005 – Present (126 since 2010),” University of North Carolina Cecil G. Sheps Center for Health Services Research,

²David Mosley, Daniel DeBehnke, M.D., Sarah Gaskell, and Alven Weil, “2020 Rural Hospital Sustainability Index,” Guidehouse, April 2020,

³Lyle Muller, “Industry leaders expect COVID-19 to take some Iowa hospitals down,” Des Moines Register, June 3, 2020,

⁴David Mosley, Daniel DeBehnke, M.D., Sarah Gaskell, and Alven Weil, “2020 Rural Hospital Sustainability Index,” Guidehouse, April 2020,

⁵“IHA Hospital Economic Impact Report,” Iowa Hospital Association, 2020,

⁶“Critical Access Hospitals (CAHs),” Rural Health Information Hub, 2020,

⁷“Iowa Rural Healthcare Facilities as of January 2020,”

⁸“IHA’s Third Way: A Path Forward for Managing Medicaid in Iowa,” Iowa Hospital Association, 2020,

⁹Lyle Muller, ”Health and human provider relief fund allocations to Iowa hospitals, as of May 13, 2020,” IowaWatch database compilation of U.S. HHS data, May 19, 2020,

¹⁰Lyle Muller, ”More than $500M in federal aid heading to Iowa hospitals would cover only half their COVID-19 losses,” IowaWatch, May 19, 2020, -half-their-coved-19-losses/.

¹¹Paul Gerrard, M.D., Sheila Madhani, “Congress Considers Timeline as Accelerated and Advance Payment Recoupment Looms,” The National Law Review, September 18, 2020, Volume X, Number 262,

¹²Lyle Muller, “Industry leaders expect COVID-19 to take some Iowa hospitals down,” Des Moines Register, June 3, 2020,

¹³”Trump Administration Announces New Actions to Improve Access to Healthcare across America,” U.S. Department of Health & Human Services, August 3, 2020,
“HHS Releases Rural Action Plan,” U.S. Department of Health & Human Services, September 3, 2020, https://www/;
“Trump Administration Announces Initiative to Transform Rural Health,” Centers for Medicare & Medicaid Services (CMS), August 11, 2020,
“Rural Reform Proposal,” Iowa Hospital Association, 2020,

¹⁴Martha Stoddard, “Chain of 21 Nebraska nursing homes placed in receivership after missing payroll,” Live Well Nebraska, March 26, 2018,

¹⁵Tony Leys, “Marshalltown hospital to close its birthing center…,” The Des Moines Register, August 15, 2019,

¹⁶Steve Vockrodt, “Massive fraud case involving Missouri hospital brings criminal charge to ex-CEO,” Kansas City Star, September 30, 2019,

¹⁷“Hospital Chain Will Pay Over $260 Million to Resolve False Billing and Kickback Allegations; One Subsidiary Agrees to Plead Guilty,” The United States Department of Justice, Office of Public Affairs, September 25, 2018,

¹⁸Of 42 hospitals filing for bankruptcy between 2000-06, more than 60% ceased operating entirely.  “Factors Associated with Hospital Bankruptcies: A Political and Economic Framework,” Journal of Healthcare Management, Vol. 54, Issue 4, July 2009.

¹⁹Laura Coordes, “Reorganizing Health Care Bankruptcy,” Boston College Law Review, Forthcoming, March 3, 2019, available at SSRN:

²⁰Ayla Ellison, “29 hospital bankruptcies in 2020,” Becker’s Hospital Review, June 3, 2020,'re%20estimated%20to%20lose,nonelective%20surgeries%20and%20outpatient%20treatment