This article is the fifth in a multi-part series on “Reviving Rural Oklahoma.”

Those who regularly monitor rural America know that one of the surest signs of a town or city about to enter the slide to near-ghost-town status is the loss of their school and/or their hospital. The loss of either one makes it exceedingly difficult for the town’s leaders to recruit future businesses, or even retain existing ones.

How bad is the situation with Oklahoma hospitals? Randy Ellis reported August 3 in The Oklahoman:

Oklahoma rural hospitals are under financial siege. “It’s very scary right now,” said hospital consultant Val Schott, 71. About 56 percent of Oklahoma’s rural hospitals operated at a financial loss between 2009 and 2013.“I would say probably 70 (percent to) 75 percent of the hospitals in rural Oklahoma are having some kind of financial struggle,” Schott said.

Moreover, most rural hospitals are facing extreme difficulty in recruiting and retaining physicians to the rural areas.

I think we all understand that the stagnant or negative population growth in some of the rural counties has had an impact, but the hospitals say it goes much further than that. A major part of the problem comes from issues within the Affordable Care Act (ACA).

Roger Knak, chief executive officer of Fairview Regional Medical Center in Major County, has faced some tough cash-flow issues. He told The Oklahoman that his hospital recently was down to four days of cash on hand to pay expenses.

Mr. Knak cites systemic problems with the ACA, including one of the “cost saving” elements that was supposed to help pay for the ACA. The electronic medical records requirement was supposed to not only improve patient service but also reduce costs by finding fraud and waste. The upfront investment in hardware, software, and employee training of this section of the ACA was known to be considerable, especially for cash-strapped rural and inner-city hospitals.

The Obama administration had included a federal reimbursement plan for hospitals to help cover these costs. But is anyone surprised that there are problems? As The Oklahoman reported:

While the federal government said it would reimburse the hospital for its costs, the hospital had to pay $923,000 up front and then wait for reimbursement, which put it in a financial bind, Knak said. When the hospital was finally reimbursed, it only received a portion of what it was promised, which helped but didn’t relieve all the financial stress, he said. And the electronic records system reduced productivity in the clinic by 30 percent because it takes doctors longer to navigate, Knak said.

But the ACA’s failure to deliver on Mr. Obama’s promise of reducing the uninsured is even more central to the hospital’s problems. The Oklahoman reports:

He said proponents of the Affordable Care Act (Obamacare) told hospitals they could expect an increase in the percentage of insured patients to offset other increased costs that hospitals were asked to absorb. But Major County still has 21 percent of its residents uninsured, the same level as before, he said.

All of this has compounded a long-running problem in maintaining doctors on staff in rural Oklahoma. Mr. Knak noted that at his hospital, “I’ve been struggling for almost three years to replace a physician who left us.”

PMTC Isn’t Working. Try Something New.

Oklahoma state legislators can’t fix the issues with the ACA, but there are two immediate actions they can take that will help rural hospitals weather the storm and return to firmer financial ground. And the good news for Oklahoma taxpayers is that lawmakers won’t have to take any more money from taxpayers to do it.

First, it is time that one of the “legacy” programs from Oklahoma’s past is eliminated and the funding put to a more productive use. The mission of the Physician Manpower Training Commission (PMTC) is “to enhance medical care in rural and underserved areas of Oklahoma by administering residency, internship, and scholarship incentive programs that encourage medical and nursing personnel to establish a practice in rural and underserved areas. Further, the PMTC is to upgrade the availability of health care services by increasing the number of practicing physicians, nurses, and physician assistants in rural and underserved areas of Oklahoma.”

The PMTC is approaching 40 years of attempting to reach that goal. It’s time to face the fact that it’s not working. According to the Governor’s historical budget book, the PMTC received around $6.5 million in fiscal year 2014, of which just under 10 percent went for salary and other employee expenses. Why not repurpose it in a way that more than doubles the $6.5 million and allows individual communities and their hospital administrators to control those funds? Here’s how to do it.

Oklahoma should apply for what is known as an 1115 Waiver under the Social Security Act.

Securing a waiver under this Act allows those funds to become eligible for a Medicaid matching payment. One of the principles for obtaining one of the waivers is to “increase access to, stabilize, and strengthen providers and provider networks available to serve Medicaid and low-income populations in the state”—which is what saving those rural hospitals provides.

The legislature could sunset the PMTC, allow a skeleton staff to remain to close out the scholarship program and other ongoing programs, and ask the Centers for Medicare & Medicaid Services (CMS) to grant an 1115 Waiver targeted specifically to rural hospitals. There are numerous ways to do this, as I discovered when working for Gov. Frank Keating and was instrumental in designing and implementing the upper payment limit using the 1115 Waiver program.

The net fiscal effect of removing the PMTC’s funding and transferring it to an 1115 Waiver program would be to increase the $6.5 million to more than $16 million based on the current Medicaid matching rate. All this would not be available immediately, but if the PMTC is disbanded and issues no further scholarships some funds would free up immediately, and within a very few years the whole amount plus the Medicaid match would be available to disburse directly to rural hospitals. These hospitals could then upgrade facilities and hire doctors and nurses.

Let’s be clear: this is not a Medicaid expansion and has no effect on the number of recipients. Properly written, this waiver would only apply to raising reimbursement levels for Medicaid services provided by rural hospitals to make them more financially viable. If the application is limited to that guiding principle, it is almost certain that CMS will approve the waiver.
But that’s not all a properly written waiver could do for rural Oklahoma hospitals.

Many of these rural communities have a local-tax-based revenue stream flowing to their hospitals in order to keep them operating. Some states already allow Local Hospital Districts, which when formed can use those tax revenues to apply for the same Medicaid match as we discussed in the PMTC situation. Again, this is not an expansion of Medicaid either in Oklahoma tax dollars or number of recipients. It is merely using existing dollars to provide stability to rural health care by increasing payments to doctors and hospitals in those areas for Medicaid services.

In fact, we suggest that policymakers give the Local Hospital Districts the option to increase recipient levels or types of services, but only if those residents of the Local Hospital Districts vote an additional tax on themselves to fund it. The condition that must be included for the creation of the Local Hospital Districts would be that in the future, expansions of Medicaid recipient levels or new services can only be done at the local level through the Local Hospital Districts, with the same restriction that it must be funded with local tax dollars approved by their residents.

One of the major inefficiencies of Medicaid has been its statewide expansion approach, which ignores income and health need differences between different areas of the state. Many, if not most, previous Medicaid expansions have been driven typically by major metropolitan legislators, activists, and providers, with little or no attention to the rural areas’ demographic health needs differences.

The other major flaw in the current Medicaid structure has been the separation of payer (in the case of Medicaid, it is you the taxpayer) and service recipient. That disconnect has created a system that struggles to provide positive outcomes. Issues are largely approached with the standard call for more money that far too often legislators provide. Imagine the difference in accountability that would come when it requires a vote to tax local citizens for a service or recipient expansion. A local community has a far greater grasp of the needs of those who are poor amongst them than those under the dome in Oklahoma City.

Rural Opportunity Zones

The combination of the PMTC conversion and the Local Hospital Districts would bring a considerable amount of new funding to rural hospitals. But there is one additional thing state legislators can do to help rural hospitals.

In the 2015 legislative session, lawmakers came very close to passing legislation creating Rural Opportunity Zones (ROZ). The basic plan as advanced was to make any individuals who moved to those counties from out of state free from individual income tax for 10 years. Lawmakers could improve the ROZ concept by adding an amendment which says that any medical specialist who moved to a rural community to work in their healthcare system would also be eligible.

Would excluding high-income earners from state taxation make a difference in the ability of rural hospital administrators to hire medical staff? Anyone who doubts it might want to call the Ashland, Kansas, hospital administrator and ask him to tell you about his experience with the Kansas ROZ program. I served in the first few years of Governor Sam Brownback’s administration. As one of the primary forces behind the Kansas ROZ passage, I often received letters or phone calls about the program. One such unsolicited endorsement came from the Ashland hospital staff. The letter was so moving that Governor Brownback invited the administrator to attend and be recognized at the State of the State speech.

Oklahoma legislators can give rural hospitals the tools they need to help their hospitals—and the cost to Oklahoma taxpayers is nearly non-existent.

Steve Anderson (MBA, University of Central Oklahoma) is an OCPA research fellow. A Certified Public Accountant with more than 30 years of experience in private practice, he is currently a partner at Anderson, Reichert & Anderson LLC. Anderson spent two years as a budget analyst in the Oklahoma Office of State Finance, and most recently served as budget director for the State of Kansas. At one time he held 17 state teaching certifications, ranging from mathematics to physics to business.