While reform legislation includes many provisions designed to benefit small and rural hospitals, the law also challenges these institutions to evaluate their operational strengths and weaknesses and even reconsider their independence.

Accountable care organizations aim to improve outcomes and reduce inefficiencies and expenses. For rural organizations to play a meaningful role in ACOs, they will need to assess their performance on several levels. Then, they can determine whether they should drive the creation of an ACO, participate in one that already has formed, or focus on shoring up operations to be an attractive partner in the future.

The hallmark of leadership is the ability to chart a steady course through uncertain territory. This article offers leaders of rural hospitals concrete ways to assess opportunities and to develop strategies that will enable their hospitals to remain relevant during and following the redesign of the health care delivery system.

Expanded Accountability

An ACO is made up of providers who are held jointly accountable for achieving measurable quality improvements and reductions in the rate of spending for the care delivered to a defined subset of program beneficiaries or other populations. It is liable for the quality, cost and patient experience of all care delivered across the continuum from acute episodes in the hospital to physician office visits to chronic disease management and home care.

To payers, an ACO is accountable for achieving specific spending targets and clinical outcome improvements. When it meets or exceeds these targets, an ACO is rewarded with a share of the overall savings. In some arrangements proposed by private payers, there might be penalties for failing to meet targets.

Reform legislation requires that hospitals and physicians forming an ACO have a formal, legal structure to receive and distribute shared-savings payments. These organizations must commit to the program for at least three years once it has been initiated. Leaders of these new structures will need to include both clinical and administrative personnel.

Risk and Reimbursement

To keep costs in check, an ACO will need to determine how participating providers will be reimbursed for the services they provide to members. However, the ACO's method of reimbursement may put the hospital at financial risk for the services it provides to members. Hospitals may be reimbursed on a per-case basis, such as the current diagnosis related group methodology employed by Medicare, or they may be paid for an entire episode of care, putting the hospital at additional risk for pre- and posthospitalization care and for any readmissions related to the original admission.

Critical access hospitals, which currently enjoy the benefit of cost-based reimbursement, will be particularly challenged to operate within an ACO. The per-case or per-episode reimbursement methodologies will require CAH management to shift focus from maximizing reimbursement under a cost-based system to managing care, efficiency and cost on a patient-by-patient basis. This is a significant shift for leaders and likely will require new skill sets in the C-suite.

Keep an Eye on the Market

ACOs will be responsible for managing the overall health of the populations they serve, and they must have a minimum of 5,000 Medicare beneficiaries to qualify. To control population health and the associated risk, ACOs will need a patient base that is large enough to make population health cost-effective and to minimize financial risk. As such, they will actively reach out to grow their patient populations.

As ACOs attempt to expand their patient base, patients of rural hospitals, including CAHs, may be targets. Rural and community hospitals should investigate the initiatives under way at area competitors and track inroads into their community. They can't afford to assume that their patient base always will be there.

Because CAHs and other small, rural hospitals generally do not have the population needed to support many of the necessary elements of an ACO, they must develop an effective, forward-looking strategy that includes a hard look at market opportunities. These hospitals will need to be open to the possibility of partnering with other organizations, either through an affiliation or an acquisition, to be effective participants in ACOs.

'Make vs. Buy'

A critical step for rural health systems and physicians is determining the most effective way to gain the skills and capabilities needed to become an ACO. In many instances, this decision will come down to a "make vs. buy" judgment.

Making or developing an ACO is an option for health care organizations that already have many of its components. Mature integrated health systems, like Geisinger Health System and Kaiser Permanente, are well-positioned to become ACOs due to their networks of physicians, hospitals and internal insurance functions. Other organizations may be lacking key components, but have sufficient capital available to develop those essential pieces.

In a region served by several community hospitals, these organizations and their physicians can pool their resources to form an ACO. However, this is more difficult than having a single organization drive the ACO development.

Buying the missing components is an alternative method of achieving ACO status. Hospitals or physicians can purchase the functions from other organizations or partner with other institutions that can provide them. For example, hospitals can align or employ additional physician groups to increase the ACO's population base, lease the risk-management component from an insurance company, or purchase home health capabilities.

Alternative Strategies

Understanding the size, demographics and utilization patterns of the market will clarify a hospital's options. In many cases, rural hospital leaders realize that their institutions must form a relationship with one or more organizations to achieve broader goals. Even if a hospital can't drive an ACO, it still can have a strong role in its development and ongoing operations. That role depends on a hospital's strength in areas that bring value to the ACO: integration with physicians, cost and quality positions, financial health and the extent to which it has implemented a systemwide IT platform.

Rural administrators and trustees should assess their organization's performance in the following areas to shape their strategy.

  • Physician alignment: Cultural, strategic and financial alignment of providers is imperative to efforts to improve the quality and lower the cost of care.
  • Quality: The hospital must meet or exceed quality-of-care benchmarks.
  • Cost: The hospital must maintain or achieve a position of low cost per unit of service provided.
  • Financial position: The hospital will need to maintain or achieve a healthy financial position to support physician alignment and IT implementation.
  • IT: A fully integrated and operational IT platform will enable coordination of care and examination of quality and cost performance.

Operating in an ACO environment will require rural hospitals to embrace, develop and implement strategies and processes that improve the delivery of care to their patients and to the community while reducing costs. Hospital leaders will need to balance their fiduciary responsibilities and their desire to maintain local control with the realities of their market position.

While these decisions will carry risk, hospital leaders can optimize their positions at the bargaining table and get the most out of their new relationships by first understanding what they need and what they have to offer an ACO.

Self-Assessment for Rural and Critical Access Hospitals

Physician Alignment



Financial position

IT platform

Little alignment or integration; medical staff comprises small, independent physician groups

Below state average on 95 percent of core measures

High cost per unit of service

Not able to fund current depreciation expense

No inpatient or outpatient EMR

Employment out of necessity; state of relationship with independent physicians is varied

Meet state average on 50 percent of core measures

Moderate cost per unit of service

Funding depreciation but operating at a loss

Inpatient EMR

Mix of employed and independent physicians; fragmented approach to physician alignment

Meet state average on 75 percent of core measures

At the median cost per unit of service across the region

Breaking even from operations

Inpatient EMR; private physician practices have pursued their own EMR

Mix of employed and independent physicians; development of strategy and consolidating body for alignment between hospitals and physicians

Meet state average on 90 percent of core measures

Respectable cost position in market

Positive operating margin of 0 to 4 percent

Inpatient EMR; systemwide IT strategy development has been started; some physician practices have integrated system

Full integration with physicians; have alignment organizations with physicians

Meet or exceed state and national average on 95 percent of core measures

Lowest cost provider in region

Greater than 4 percent operating margin

Systemwide IT implemented and adopted by all users

Source: Stroudwater Associates, 2011

Susan Stowell (SStowell@stroudwater.com) is a principal and James Puiia (JPuiia@ stroudwater.com) is a senior consultant at Stroudwater Associates, Portland, Maine.

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