Rural Health

Rural Hospital Flexibility Grants

Authorizing Legislation - Section 1820(j), Title XVIII of the Social Security Act.

FY 2008 Authorization..................................................................................................$35,000,000

Statement of the Budget Request -The FY 2008 Budget does not request funding for this program. This is $63,538,000 below the FY 2007 Continuing Resolution (CR).

Program Description - This program supports three different grant activities. The first is the Rural Hospital Flexibility (Flex) grant program, which provides grants to States to support small rural hospitals. Grant funds are used to help more than 1,277 small, financially vulnerable hospitals who have converted to Critical Access Hospital (CAH) status, which provides cost-based payments under Medicare and more flexible Medicare Conditions of Participation. States work with their small rural hospitals to develop networks of care and improve quality of care and integrate with emergency medical services (EMS) in their communities. The funds can be used to continue to implement State rural health plans that were developed at the outset of the funding cycle.

States are also eligible under this authority to receive grants under the Small Rural Hospital Improvement (SHIP) program. This program provides grants of about $9,000 to 1,500 eligible hospitals (hospitals of 50 beds or less located in a rural area). The grants can be used to meet the requirements of the Medicare Prospective Payments System; comply with the provisions of the Health Insurance Portability and Accountability Act (HIPAA); and/or reduce medical errors and support quality improvement.

In FY 2006, the Congress created a third program under this authority. The Delta Health Initiative was appropriated $25,000,000 to address the rural health needs of the Mississippi Delta. The program focuses on rural health, education, and workforce infrastructure needs.

Rationale for the Budget Request - There is no FY 2008 Budget request for this program. The need for this program has decreased as the result of the approximately $25 billion investment in rural provisions within the Medicare Modernization Act of 2003 (MMA).
Funding levels for Rural Hospital Flexibility Grants during the last five years are as follows:

Outputs    

Performance Analysis - The Rural Hospital Flexibility Grant program performance measures focus on increasing the financial viability of Critical Access Hospitals (CAHs), assisting rural hospitals in conversion to CAH status and increasing network development. The program’s primary purpose was to provide support to States to determine if rural hospitals might benefit from conversion to CAH status. To date, more than 1,277 hospitals have been designated as CAHs and the States have had six years to identify those facilities that would benefit most from conversion. The majority of those conversions have taken place.

The number of hospitals converting to CAHs has grown rapidly from 657 in FY 2002 to 762 in
FY 2003, 930 in FY 2004, 1,100 in FY 2005, and 1,277 in FY 2006, all of which were far beyond the original targets for growth. In addition, CAHs are seeing rapidly improving financial status, in part due to the Flex program investment. In FY 1997, when this designation first became available, CAHs had an average operating margin of -28 percent.

The most recent period for which Medicare cost report data is available shows that in FY 2005, CAHs had an average operating margin of -9.6 percent, which is a marked improvement from the original baseline margin of -14.05 and better than the 2004 measure of -10.2. (See “Details of Performance Analysis”)

This program was covered in OMB’s combined PART assessment of HRSA’s Rural Health Activities during the FY 2005 budget cycle. The program received a rating of Adequate