An Issue Paper Prepared by the National Rural Health Association-February 1998

This paper provides a description of what types of health care systems rural communities should work to develop as an outcome of national health care reform, and represents the NRHA's effort to develop a national consensus on the optimal models of reform for rural communities.

Also included in this paper are summaries of several major health reform trends and their impact on rural health systems, including consolidation of the health care system, shrinking dollars for rural health care, stresses for rural providers in dealing with the change processes, the absence of a collaborative vision for rural reform, and the relationship between the rural health system and rural economic vitality.

Additionally, a set of commonly accepted principles is provided that correlates with rural communities successfully sustaining their health care systems. There also is a general discussion of the response options for rural providers in preparation for managed care.

Optimal models for reformed rural health systems are then described in which the community is the central organizing and sponsoring entity for the human services system. The key characteristics of these community-based models are then listed, characteristics that, in general, are likely to achieve the goal of sustaining broad and effective services in America's rural communities.



The challenge for rural communities during this reform period is often simplistically described as "getting ready for managed care." What is actually underway are the most profound changes in the health care system in modern times, affecting all providers and both the way services are delivered and the way financing is handled. The implications for rural communities are also profound. As particular populations are mandated to be cared for in "managed care" delivery systems, the clock rapidly begins to tick for providers, including rural providers, to make strategic decisions that have long-term implications about how they relate to other providers in their communities, who they work or partner with outside of their communities, and how and how much they will be reimbursed. There are also significant implications for local access to care and for the quality of services to rural residents if rural health services and rural health financing are compromised.



Consolidation. Health care's transition from predominantly an industry characterized by small provider and institutional units to large consolidated systems is one of the most important trends, especially for rural communities. In the frenzy of market forces, huge, largely urban-based delivery systems are securing their population and referral bases through purchases, alliances and various affiliations with both similar and other provider types-hospitals, physicians, etc.

Both for-profit and not-for-profit systems are finding control and ownership of rural hospitals and many primary care providers attractive, to both secure referrals and to offset unfavorable primary care to specialty physician ratios in their current systems. Purchases by these consolidated systems can provide various benefits to fragile or struggling rural boards, managers and providers, but there are also negative consequences: loss of ownership, loss of control over some clinical decision-making, imposed patient referral patterns, and mandated referrals out of the community for some services and procedures. The latter occurs as competition increases, premiums decrease, and health maintenance organizations (HMOs) claim they cannot afford to duplicate services in rural communities that are already being provided centrally, i.e., in their urban centers.

Some rural hospital trustees may be faced with making decisions to sell or offer hands-off long-term leases because they believe there are no other good options in this complex and demanding environment. Physicians and other providers may be faced with similar situations.

Aggressive acquisition strategies by urban-based or massive regional or national systems are creating extremely uneven power configurations between large and small, urban and rural. The nature of the acquisition activities by these systems may overwhelm rural providers and rural owners. What is still to early to predict is the willingness of large systems to continue to own and operate rural institutions and services when they are no longer financially attractive. Then how will communities be able to respond to sustain core services that are threatened with closure or extinction?

Consolidation, then, has secondary implications for rural providers and communities that go well beyond the size and resource issues alone. These implications may include the loss of local ownership, removal of communities from positions of influence or recovery of failing institutions, interference in clinical management, mandatory referrals out of communities for services with secondary erosion of the scope of local services.

Shrinking Health Care Dollars. Two simultaneous trends are confronting rural providers. First, the overall decreases in expenditures for health services affects all providers. The downward trend in premium payments by purchasers is most notable in areas where market forces have created substantial competition. But, secondly, the percentages of the already shrinking premiums being recovered by rural providers are tending to decrease. This also is most evident in advanced managed care markets.

As the payments mechanism shifts from fee-for-service to prepayment/capitation for a larger percentage of the rural population, these dual forces are having greater impact, especially in rural communities where the providers are weakly positioned to negotiate with their contracted HMOs for better payment rates or for more of the premium. It is becoming increasingly clear that the medium- and long-term impact of these financial forces, absent regulatory action such as access standards, threatens to shrink the range of health services in many communities well beyond what is both appropriate and sustainable under different scenarios of community advocacy and control of health dollars (these scenarios will be discussed in greater detail below).

The Stresses and Struggles of Dealing With These Changes. The magnitude of the changes facing most communities can be stressful for providers and communities as they are attempting to establish new and complex intra-community organizations involving multiple providers and provider types. Additional complexities include working to develop regional affiliations and networks involving multiple communities sometimes in spite of complicated implications. While many community providers are getting outside help and consultation, the resources and the available pool of rural-savvy and sensitive external help are both often inadequate. For physicians and other clinicians, the addition of the organization-building work, added to already heavy clinical demands, is commonly creating levels of stress, workload and frustration not seen in decades, even in chronically underserved communities.

Moreover, it seems clear that within the next two to three years at most, every rural community in the nation will have made decisions regarding both local and regional affiliations, including participation with managed care organizations and HMOs. As soon as the first major payer group mandates managed care for its enrollees, every rural provider in the community must have a relationship with an HMO or lose the ability to serve that population. With Medicaid moving quickly toward managed care in most states, and Medicare not far behind, the public payers are driving the need for organizational, partnering and network decisions by local providers. Within a short period, alliances, networks, relationships or new ownership will be established with long-term consequences for virtually all providers in every rural community. The crucial issue is whether providers within a community will primarily organize together, or whether certain providers will organize themselves with outside provider organizations. There is a great lack of appreciation for the risks and downsides of some of these long-term relationships for rural providers, both clinically and financially. The range of choices community providers are presented with and the implications will be discussed below.

A National Vision for a Reformed Rural Health System. Several years into this reform process, it is apparent we need a commonly agreed upon vision among rural providers, community leaders and rural advocacy organizations that clearly articulates what kind of local health care systems we should be aiming to achieve from reform. There has been far too little discussion of what has been learned about sustaining rural health services that might help rural leaders guide their decisions, relationships and advocacy.

The failure to articulate an "end game" perspective of a reformed rural health system, or a least the general description of a viable, integrated rural system, makes it unlikely many communities will get to the level of structure-building, integration and mastery over their futures that would correlate with an increased likelihood of sustaining their delivery systems. Because this a rapidly transforming process, it is sometimes difficult to have open discussions regarding the serious implications of these changes.

The Relationship Between the Rural Delivery System and Rural Economic Vitality. Health care accounts for about 14 percent of the nation's economic activity. There are strong advantages to maintaining and expanding the rural health care industry relative to other more common rural economic development strategies: 1. the foundation is already in place for this industry; 2. jobs in health care are relatively high-paying; 3. health care has low environmental risks; 4. health care continues to be a growth industry; 5. access to appropriate services is provided; and 6. exporting services from rural providers to urban centers may disrupt continuity of care, lifestyles and the flow of dollars, weakening the rural economic infrastructure. Despite the recent moderation in the growth rate of national health care expenditures, the industry has continued to add jobs at a rapid rate.

Most rural residents and community and business leaders are becoming more aware of the importance of the health care system to the economic vitality of their communities. Rural health development experience has often shown, however, that in many communities residents look to the providers to show the way to ensure that what they want is accomplished in terms of scope of services, quality and affordability. The emotional appeal to "shop at home" doesn't work unless the services provided locally are acceptable or even better than those out of town. In this changing environment, local health care providers are faced with focusing on health care as a local economic generator versus focusing on the delivery of quality health care services in their communities.



This section provides a set of principles, based on rural health services research and on the experiences of rural communities, that correlates with community success in sustaining rural health care systems. It is important to include them in this paper to provide information for rural providers and leaders, but also so that they can be used as a guide for community providers to compare their efforts, choices and decisions.



By the time managed care makes its appearance in a rural community, providers take one of five general tracks depending on their degree of preparation, their commitment to integration, and their levels of confidence and advocacy. These five tracks follow.

  1. Providers deny the role and presence of managed care in their communities and resist preparation and change.
  2. Providers make individual decisions to contract with an HMO or HMOs, becoming part of their networks.
  3. Community providers establish a local managed care structure, i.e., physician-hospital organization (PHO), and contract as a single entity. Rural providers who join HMO networks may negotiate better reimbursement rates and other conditions of participation.
  4. Providers in several communities form an alliance or network and, if they establish "single signature contracting," contract as a unit to be part of the HMO network. Increased negotiating strength usually provides some benefit, either in terms of better reimbursement rates, locally retained managed care or administrative services, or broadened control over local clinical decision-making.
  5. Communities or networks develop community health plans, combining delivery and financing systems at the local level. Assuming responsibility for the financing of care for prepaid enrollees is accomplished either by rural communities obtaining their own HMO licenses or by establishing strategic partnerships with HMOs or insurance companies that allow local assumption of financial risk.

Several observations about these choices are important. In general, the easiest courses are options one and two. Complexity increases as providers move down the series of options. However, maintenance of local provider control over clinical and resource allocation decisions increases as providers move from option one toward option five.

Options two, three and four change the amount of negotiating strength rural providers bring to the table when contracting with HMOs. Under all three of these scenarios, rural providers participate in managed care organizations and the health care premiums go to these organizations. A fundamental value conflict usually exists-the HMO's primary interest is to maximize its financial gain, accomplished partly by reimbursing providers at the lowest rates that it can achieve. Rural providers and communities, on the other hand, need to obtain the best reimbursement rates possible, primarily to sustain their local delivery system. In some cases, regional networks are able to access and control a large part of the medical portion of the premiums, but this is not typical. More often, rural providers in advanced managed care markets are severely squeezed financially as HMOs deal with shrinking payer premiums and continue to decrease provider reimbursement. Option five provides the opportunity for maximum control of premium dollars and clinical decisions, including the benefits of related premium surpluses, if they exist and the maximum assumption of financial risk.

Preoccupation with risk rather than with financial control ignores several important considerations. First, with continuing migration of health care financing from fee-for-service to predominantly prepayment, if communities can establish the necessary organizational structures, then they can coordinate and control health dollars spent by and on behalf of local residents. This has been less likely under the fee-for-service system. Second, control of local prepaid dollars allows choices for the allocation of dollars to meet local health care priorities and to recognize and support particular local provider mixes. It allows communities to reconfigure the local delivery team to meet local needs, i.e., establishing multidisciplinary teams of mental health, social service, health education specialists, etc., and to focus these services on high-risk, high-cost populations. It also puts contracting authority for out-of-area services in the hands of the rural network, a strong advantage when most urban areas have surplus hospital and specialty physician capacities. This control ensures that any surplus dollars will be retained by local providers and communities.

It is critical to recognize there are potentially receivable premium dollars for individual communities in the next decade. The magnitude of what is at stake financially for rural communities is illustrated by a projection from the Nebraska Center for Rural Health Research. Keith Mueller, Ph.D., calculated the increase in Medicare revenue for 14 rural Nebraska counties if all potential beneficiaries enrolled in managed care and compared that figure with what was spent in those counties under Medicare fee-for-service in the most recent year. The increase was $29 million.



Aggressive Community-Initiated Advocacy. Effective community- and provider-based initiatives have repeatedly been shown to be the strongest determinants of how well rural communities sustain and strengthen their health care systems. In this current complex environment, however, we need to encourage and support rural providers and other rural leaders to undertake aggressive advocacy on their own behalf. It has become clear, in the consolidating health care environment, that rural providers and communities have to assertively and effectively participate in all aspects of health care, including both the delivery and financing systems, working toward the preservation of local systems. In regions where reform is more advanced, changes in the delivery system have demonstrated success with this type of participation.


Proposal for Rural Reform Models. What the NRHA proposes is a commitment to continue to develop and sustain, as models for rural America, community-based health care systems that maximize ownership and control at the community level. The NRHA believes that these models should be characterized by a set of design principles that:

While this vision for rural reform defines core principles and elements that should best correlate with meeting the needs of community residents and sustaining the broadest possible range of health services, it also provides for a variety of community-based organizational models, reflecting the diversity of local and provider histories and cultures across America's rural landscape.

By articulating this vision for rural reform models, a framework is set for action for community, state and national programs that strengthens community health systems in a changing environment.

This paper should be used effectively at three levels:

  1. to provide active guidance to and vision for rural providers and leaders as they work to clarify and develop sustainable delivery systems for their communities,
  2. to inform state and national policy-makers, helping them understand what types of support are necessary to develop and sustain these models for America's rural communities, and
  3. to provide a framework for the development of future programs and services by the NRHA, in conjunction with other health care rural advocates, to achieve these principles.