Cash Flow of Small Rural Hospitals: The Impact of the Medicare Outpatient Prospective Payment System

Research center:
Lead researcher:
Bonnie Blanchfield, ScD, 301.656.7401
Project completed:
February 2001
Medicare s new outpatient prospective payment system (OP-PPS) is expected to have significant repercussions for hospitals, especially small rural hospitals. Currently, rural hospitals with fewer than 100 beds are protected from financial loss by a temporary "hold harmless" provision of the Balanced Budget Refinement Act. However, concern remains that outpatient payment reform will not only threaten the long term financial health of small rural hospitals but will adversely affect their cash flow position in the short term. The objective of this research is to characterize the cash flow position of small rural hospitals prior to OP-PPS and estimate the expected changes in cash flow positions as a result of OP-PPS if the "hold harmless" provision were not in effect. The principal sources of data for this study are hospital-audited financial statements for fiscal years 1997 and 1998 for short-term acute care hospitals located in Iowa, Texas, Washington, and West Virginia. Although these states are not nationally representative, they have relatively large rural populations and diverse health care infrastructures. Bivariate analysis is used to assess the impact on cash flow. By anticipating the impact on cash flow while the "hold harmless" rule is in effect, this study alerts policymakers to unintended consequences of OP-PPS for rural hospitals.