Scotland County Hospital in Memphis, Missouri, is facing financial and administrative turmoil with auditors warning it is in danger of failing (Rudi Keller/Missouri Independent).
MEMPHIS, Missouri – In March, Scotland County Hospital’s auditors delivered a stark warning.
After five consecutive years of losses, only federal COVID-19 payments received over the previous year had kept the 25-bed hospital’s bank account solvent.
In the fiscal years covered by the audit, accounting firm BKD reported, the hospital lost $7.9 million — $2.3 million in 2020 and $5.6 million in 2021. The losses, the audit stated, “raise substantial doubt” about its ability to stay open.
“Every year they have that in the auditor’s report,” said long-time board member Bob Neese, who resigned in September. “It was the same old dire message that you’re going to have to do something, there’s going to have to be some changes if you are going to be able to continue going forward.”
Changes have already come to Scotland County Hospital, though not as many would have expected.
On Monday, The Independent reported on administrative turmoil at the hospital that saw its two top executives abruptly fired after a secret board meeting — setting off a wave of accusations of financial wrongdoing, possible criminal inquiries and the resignation of half the hospital’s board of directors.
No charges have been filed. No detailed explanation has been given.
For the past two months, The Independent has investigated the turmoil, accusations of financial wrongdoing and possible criminal inquiries at the Scotland County Hospital. Details of the tumult were revealed through Sunshine Law requests, interviews with people inside and outside the hospital and the reporting of the local newspaper, the Memphis Democrat.
Yet while the leadership drama at Scotland County Hospital is unique, its financial woes are not.
Ten rural Missouri hospitals have closed since 2012. If Scotland County becomes the 11th, emergency care would be almost an hour away in Kirksville.
The dire financial challenges of Scotland County Hospital are similar to those facing rural hospitals around the country, said Brock Slabach, chief operations officer of the National Rural Health Association.
Almost half of the country’s 1,850 rural hospitals are operating in the red, Slabach said, and one-fourth are financially vulnerable.
“It is just a continuous circle of issues that keep feeding back on itself,” he said.
Rural hospitals serve small populations – Scotland County hospital takes care of 12,300 people in five counties – so making any service pay is difficult. Insurers often pay less for services provided at rural facilities; that can lead to difficulties paying competitive salaries for professional staff.
The pandemic added to those difficulties and many providers are finding it difficult to return to pre-pandemic service levels.
“Rural communities have a worse economic outlook than urban communities,” said Dan McKinney, administrator of the Hermann Area District Hospital. “I think we are going to see some tough times.”
Because of the COVID-19 pandemic, Scotland County Hospital received $12 million in extraordinary federal aid that helped pad its bank account against losses.
On June 30, 2019, the last day of the fiscal year, there was enough cash to operate for 29 days. A year later, the balance was good for 197 days of operation. This past June 30, it had shrunk to 61 days.
The federal help came in three forms: Medicare advance payments, which had to be repaid; Paycheck Protection Loans available to businesses generally; and provider relief payments intended to cover revenue missed by canceling non-emergency surgeries and procedures.
Scotland County took a $3.6 million advance on its Medicare payments in March 2020. For all hospitals in Missouri, those payments totaled $2 billion, with another $104 million to physicians and other providers.
Of the 35 critical access hospitals – rural providers like Scotland County – 20 received payments totaling $72.3 million.
Repayments began after 11 months, with 25% withheld from current Medicare payments. The withholding amount increases to 50% after 11 months and starts accruing interest after 29 months.
If a hospital loses Medicare market share – as Scotland County Hospital has each year since 2016 – repayment becomes harder.
Hermann Area District Hospital, a critical access hospital in east central Missouri, did not take the advance payments, McKinney told The Independent.
“We explored it and looked at it. There were other revenues coming down the road, too,” he said. “It was more problematic than it is going to be worth.”
Those other revenues included PPP loans and provider payments. For Scotland County Hospital, the aid that did not have to be repaid was worth $8.4 million – $4.8 million from PPP loans and $3.6 million in provider payments.
Many rural hospitals are asking for a longer repayment period, or for a portion to be forgiven, Slabach said.
“So far, Congress and (the Centers for Medicare and Medicaid Services) have been unable or unwilling to make significant changes to the program,” he said.
One strategy Scotland County Hospital is pursuing is to capture one-time cash payments to help ease it through changes. It hired the consulting firm BDO to analyze its Medicare cost reports for possible amendments and estimate lost revenues due to the pandemic.
On July 26, the hospital board approved an application for $470,000 in Medicare reimbursements.
Medicare is supposed to cover costs, and rural hospitals — often because of low volumes — have costs that can’t be charged directly to an individual patient’s care. Another look is often beneficial, Slabach said.
“Cost reporting is an art, not a science,” Slabach said. “It is based on a lot of assessments in valuations; you could have different people looking at things differently but get different answers.”
In an application to a separate USDA program, BDO helped prepare an application for $754,000 to cover lost revenue due to the pandemic.
Another one-time payment could help cover the costs for traveling nurses hired to fill staffing gaps. Federal law provides reimbursement through the Federal Emergency Management Agency for local governments equalling 70% of extraordinary public costs during a disaster.
Medicaid is the only source of new regular revenue not available before the pandemic.
Missouri voters approved Medicaid expansion in 2020 and the state started processing applications Oct. 1, 2021. It means that adults earning less than 133% of the federal poverty guideline receive coverage.
And in the 30 states that expanded coverage before Missouri, Slabach said rural hospitals are financially stronger.
But even though voters approved Medicaid expansion in 2020, its impact is just beginning to be felt.
Republican lawmakers at first refused to fund it, setting off a legal battle that resulted in the state Supreme Court ordering Missouri to open enrollment.
Significant delays in processing applications followed, resulting in the federal government intervening to get Missouri back in line with federal regulations.
Supporters of expansion originally predicted 250,000 to 300,000 people would be eligible for coverage.
Enrollment surpassed 265,000 early this month.
The math is simple, Slabach said. While Medicaid doesn’t cover the entire cost of care, something is better than nothing.
“Any patient that came to my facilities with available resources to pay the bill, that was a good thing,” Slabach said. “Otherwise it would go into bad debt or charity care.”
Where a medical provider is located will play a big role in how much charity care is replaced by Medicaid, Slabach said.
“Medicaid is not a big deal in western Kansas or northern Missouri, where lower numbers of people are eligible,” he said. “But if you go into southeast Missouri, it is another story.”
At Hermann Area District Hospital, Medicaid isn’t a big source of revenue. But expansion has cut charity care, McKinney said.
Through August, he said, unpaid services are down almost $70,000 for the year, a decline of almost 50%, and reimbursements through Medicaid are up about $100,000.
“We are seeing a little, from our standpoint, but it doesn’t look to be significant,” McKinney said.
Like many rural providers, Scotland County Hospital is facing difficult choices.
Costs are rising, it is difficult to find qualified professionals willing to work in remote areas and the power to negotiate reimbursements from insurers is limited.
The board fired Randy Tobler, the CEO, and Michael Brandon, the chief financial officer, in August. Before he was fired, Brandon said he and Tobler were working for financial stability.
“We were trying to right the ship and get back to that point where we were close to breaking even,” he said. “My view of it was shifting our focus more to outpatient care, ramping up outpatient care for surgeries and for oncology treatments.”
After the troubling audit, an internal email from April shows, ideas being considered to save money and increase revenue included reducing the number of inpatient beds to 10 or fewer, expanding specialist outpatient services and ending childbirth services.
A report on which services are financially viable is due soon from Stroudwater Associates, paid by the U.S. Department of Agriculture grant to Slabach’s association.
Tobler in June warned Stroudwater of the public relations challenge explaining changes to the hospital.
“I think we’re all scratching our heads with what appears to be a self fulfilling prophecy of doom and gloom in the community,” Tobler wrote in an email. “Secrets are impossible to keep, and for that reason once out, better to get it out in the open. It’s communicating to an anxious public while we retool that has us flummoxed.”
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The USDA grant supporting Stroudwater’s work is being used to provide advice and financial insights for a large number of rural hospitals, Slabach said. Three consulting firms are doing the work, chosen by each hospital to fit their individual needs.
“Each hospital gets an action plan that can be used by management to implement changes to make them more resilient for the future,” Slabach said.
New hospital CEO Meagan Weber, new chief financial officer Achim Hoyal and board chair Lori Fulk declined to be interviewed for this report.
One option for financially troubled critical access hospitals is to reorganize as a rural emergency hospital. Federal rules are still being written, but the conversion will mean eliminating all inpatient services while maintaining an emergency room and increasing outpatient care.
It is a difficult choice and for some hospitals, irreversible.
Like Scotland County, Hermann Area District Hospital has consistently lost money. But because his hospital is 34 miles from Mercy Hospital in Washington, Missouri, within the St. Louis Metropolitan Statistical Area, McKinney cannot change back if he converts to the new designation.
The rules for the program limit that choice for hospitals within 35 miles of urban hospitals.
Also like Scotland County, the Hermann hospital had positive cash flow from federal COVID aid.
“We are back into losing over $1 million this year,” McKinney said.
Personnel costs are a big part of that loss, he said. To keep beds staffed at minimal levels, he’s stuck using traveling nurses and the extra cost is about half of the projected loss for this year.
Of the 24 licensed beds, McKinney said 14 are staffed.
To open those additional beds would require additional staff, he said. Hermann can’t afford more traveling nurses and it can’t afford to raise salaries to compete with its market, he said.
Hospitals in the nearby St. Louis metro area pay more and give regular raises while he has trouble providing minimal raises, perhaps every five years, McKinney said. Nurses and lab technicians can make $7 to $8 an hour more than he can pay, he said.
“When you can go down the road half an hour and make $15,000 a year more, what do you do?” McKinney said.
Finding adequate staff willing to work for pay the hospital could afford was a challenge in Scotland County, Brandon said.
In 2021, the hospital reviewed salaries at the 34 other critical access hospitals and set a goal of paying at least 25% of the median for each position, he said.
In the spring internal discussions at Scotland County, one expensive service considered for elimination was in-patient obstetric services.
“It is a costly service mostly due to travel agency nurses,” Brandon said “Obstetrics was one of the areas where you would really see some savings.”
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But during a board meeting after firing Tobler – Scotland County’s hospital obstetrician as well as its CEO – Fulk and Weber promised to preserve childbirth services.
Hermann stopped childbirth services many years ago, McKinney said. It is a hard decision but it is worse if administrators keep “things that are heartthrobs and people like to have,” he said.
Converting to a rural emergency hospital would eliminate “swing beds,” a significant source of revenue for many facilities. A swing bed is one occupied by a patient who would otherwise be discharged from the hospital to a nursing facility.
Instead, Medicare pays for the patient to receive that rehabilitative care at the hospital. The costs are fully covered for 30 days and a patient pays a copay for the next 70 days.
The program has community benefits beyond the cost, Slabach said.
“It is a very useful and helpful program as post–acute care centers in a lot of rural places are closing now,” he said. “It keeps patients close to home and provides business for rural hospitals that would have lost them to an urban center for rehabilitation.”
The future is murky for rural hospitals, McKinney said.
“To just stay afloat, you are going to have to make some changes,” he said. “But the problem is, what are the changes?”
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