Could Obamacare Be Putting America's Rural Hospitals in Critical Condition?

By Markets Fool.com


Source: White House on Flickr

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The Patient Protection and Affordable Care Act, which you'll likely known best as Obamacare, is transforming the landscape of our health care system in a number of ways.

Obamacare brings big changes
Gone are the days where insurers could reject consumers based on preexisting conditions, or set their premiums without much regard for state insurance commissions. The new norm involves inclusion for all, with insurers unable to deny coverage to those who are sick and have preexisting conditions.

Furthermore, insurers must submit premium proposals on an annual basis, which are often decided on after some careful negotiating by state insurance commissioners. Not to mention that consumers have considerably more insurance options to choose from, which are laid out in a relatively easy, apples-to-apples-type comparison by pricing tier (bronze, silver, gold, and platinum).

Of course, there are consequences to health care reform, too. No longer can consumers simply claim invincibility and not purchase health insurance. Unless you qualify for one of the roughly one dozen exemptions as laid out by regulators, you are subject to a year-end penalty if you choose not to purchase health insurance. This penalty is set to increase substantially each year between 2014 and 2016, after which it will increase in accordance with the rate of inflation. In 2015, for example, the penalty for not complying with the actionable component of Obamacare, known as the individual mandate, is the greater of $325 or 2% of an individual's modified adjusted gross income.

On the surface, Obamacare is arguably hitting some of its intended targets. Enrollment is creeping up near 12 million-- well ahead of the 9.1 million that the Department of Health and Human Services had predicted in November 2014 -- the uninsured percentage continues to fall, and health insurance premium inflation has been dramatically reduced over the past seven years, although the recession likely had a strong role in slowing the rate of premium increases as well.

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But while Obamacare is going to work for millions of consumers around the country, it's arguably wreaking havoc in small communities and towns, according to a recent collaborative report between The Washington Post and Kaiser Health News.


Source: Centers for Disease Control and Prevention, Facebook

Rural hospitals take a beating, and Obamacare's the bullseye
According to their findings, since 2010, 48 rural hospitals have closed their doors, and another 283 are in danger of closing at some point in the near or intermediate future. The majority, as the report notes, are located in the Southern U.S.

A number of factors are being blamed for the downfall of rural and small-town hospitals, but Obamacare has been an easy target.

When the ACA was initially passed, it was widely expected that states would opt for Medicaid reform designed to improve coverage to low income workers who previously didn't qualify for Medicaid, but didn't make enough to afford health insurance. However, regulators failed to anticipate that 23 states (mostly in the South) wouldn't approve the use of Federal funds to expand Medicaid programs within their states; these states' governors argued that the long-term costs of such a move would be too great.

While the federal government would cover 100% of the Medicaid expansion upfront, it would begin shouldering some of the burden of covering these government-sponsored enrollees back to the states beginning in 2016. By 2022, the federal government was expected to push 10% of the cost of Medicaid coverage for these expanded enrollees back onto the states. States such as Texas and North and South Carolina chose not to expand their Medicaid programs, leaving millions above the poverty line but below the middle class without a means to get insurance.

So, on one hand, rural hospitals (especially those in the Southern states that didn't expand their Medicaid program)are being hurt because they're seeing little to no reduction in the uninsured rate and Obamacare limited the amount to be reimbursed to hospitals for uninsured claims.

Source: U.S. Food and Drug Administration, Facebook

But Obamacare is also responsible for reducing private insurers' reliance on government-sponsored care over time. Since 2013, Medicare reimbursements (Medicare is the program that covers 80% of medical care for seniors and a few other select situations) have been cut by 2%. Many rural Southern towns are filled with retirees and older individuals, meaning these hospitals are taking a substantial cut to their income since Medicare can be a vital component to cash flow.

Not to mention, consumers' push toward lower monthly cost tiers such as bronze and silver plans (which together make up about four out of every five plans sold) have left some rural residents with deductibles that are simply too high to pay should they need to seek medical care.

This isn't just a function of Obamacare
While it's easy to foot the blame of the poor state of some of America's rural hospitals on Obamacare -- and the reasons discussed above do certainly justify blame -- it's not the only reason why hospitals are shutting their doors to the public.

As the report also notes, people are moving away from rural America and heading to more heavily populated cities or suburbs. As people continue to leave, the stream of patients these rural hospitals see could slow to a trickle.

Source: Centers for Disease Control and Prevention, Facebook

In addition, rural hospitals simply don't have the economy of scale to compete with hospitals in larger population cities. They have a hard time luring in high-quality doctors unless they pay them an above average salary; they struggle to purchase expensive state-of-the-art equipment because it may not be used often enough to be justified; and most of their medical care revolves around emergency services, which tend to have the lowest margins.

In other words, these factors suggest rural hospitals may have been struggling long before Obamacare came around, but that Obamacare could be the final straw that metaphorically broke the back of rural hospitals in select states across America.

The push-pull economics of fewer hospitals in rural America
The slow demise of some of America's rural hospitals could wind up creating a bit of a long-term push-pull dynamic within the health care industry.

On one hand, the closure of rural hospitals could increase the cost to treat elderly and sick patients in rural communities since they'd have farther to travel for medical care. If a rural hospital closes, consumers could be stuck footing a sizable ambulance transport bill and may need to look far beyond their home for care depending on whether the next closest hospital is within their insurers' network or not.Within these states, insurers could choose to pass along these costs in the form of higher premiums to everyone in order to recoup their expenses, thus working against one of Obamacare's longer-term goals of keeping medical cost inflation under control.

Yet, on the flipside, the loss of rural hospitals may only speed up the process whereby Americans are leaving rural communities, pushing them toward more highly populated areas where hospital behemoths such as HCA Holdings or Tenet Healthcare operate. Over the long run this could provide HCA and Tenet with an opportunity to grow their customer base. Not to mention, the dynamics of supply and demand are at play here, and less hospital competition means potentially better margins for HCA and Tenet.

The dynamics of this relationship between nationwide hospitals potentially reveling in Obamacare-induced lower uninsured rates and ongoing weakness in a number of rural American hospitals is certainly worth keeping a close eye on as Obamacare continues to evolve. While Obamacare is by no means the sole killer of rural American hospitals, it may wind up providing the tipping point that leads to hospital sector consolidation in the future.

The article Could Obamacare Be Putting America's Rural Hospitals in Critical Condition? originally appeared on Fool.com.

Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.