How Do Rural Hospitals Survive When Facing Financial Instability?

As rural hospitals face financial instability, many facilities have persevered and remained open on their own, while others have experienced mergers or closures, a study published in Health Affairs found.

Demand for care at rural hospitals has decreased due to declining populations, patients increasingly seeking care outside their local area, and a shift toward ambulatory care. In addition, Medicare, which is a major payer for hospital services, reimburses less than commercial insurance.

Reduced patient volumes combined with low reimbursement have made many rural hospitals unprofitable.

Researchers used data from the Hospital Cost Report Information System from 2008 to 2018 to assess how the decline in profitability has impacted rural hospital survival.

The sample included 858 hospitals in rural markets, 325 of which were unprofitable at baseline. During the study period, 77 percent of unprofitable hospitals stayed open without merging, while 7 percent closed, and 17 percent merged.

Among unprofitable hospitals, hospitals with no other facilities within 15 miles, defined as isolated hospitals, were less likely to close or merge than those with nearby facilities. Profitable hospitals were less likely to close or merge compared to unprofitable facilities.

Hospital isolation was inversely related to within-market mergers; isolated hospitals were 4.4 percentage points less likely to experience a within-market merger. Isolated hospitals had a similar likelihood of experiencing an out-of-market merger.

All hospital types experienced mergers or closures, but critical access hospitals, government hospitals, and nonprofit hospitals were less likely to close or face an out-of-market merger.

Among unprofitable hospitals that remained open without merging through 2018, a little over half survived throughout the study period without returning to profitability. The average total margin improved but was negative in 2018 at -1.2 percent. The average cash flow margin increased from -0.7 percent in 2010 to 3.7 percent in 2018, while the operating margin went from -14.9 percent to -13.9 percent over the same period.

Average Altman scores remained high throughout the study period, indicating that hospitals may have had other financial resources to draw from. Most hospitals maintained positive net assets, including a positive general fund balance.

Occupancy rates at rural hospitals declined by 7 percentage points between 2010 and 2018, highlighting the consistent reduction of inpatient care.

There were 285 rural markets included in the study, 192 of which had hospitals that were unprofitable at baseline. Among these markets, 44 percent experienced some type of market restructuring by 2018, 22 percent lost a competitor to a closure or within-market merger, and 33 percent of markets lost a competitor to an out-of-market merger.

Markets with three or fewer competitors were less likely to face closures or mergers compared to larger markets. In markets with unprofitable hospitals, 12 percent of small markets lost a competitor by 2018 compared to 38 percent of larger markets. All hospital closures happened in markets with unprofitable hospitals, the study noted.

Overall, 16 percent of rural markets lost a competitor to closure or within-market mergers and 27 percent experienced an out-of-market merger between 2010 and 2018. The number of markets with three or fewer competitors grew by 14 percent, and the number of monopoly or duopoly markets increased by 7 percent.

The study findings suggest that the process of hospital consolidation may be slow as many unprofitable hospitals survived without closing or merging. Additionally, consolidation may have a larger impact on markets with fewer competitors.

As competition declines in rural markets, policymakers should create a regulatory framework that helps support continued access to care and limits the ability of hospitals with market power to charge high prices, researchers said.

Some states have implemented Certificate of Public Advantage (COPA) laws to help regulate mergers and acquisitions. But the success of these laws is mainly dependent on their design and enforcement.

“The ability of unprofitable hospitals to survive has prevented (or likely delayed) a more serious situation, but continued attention on how to regulate rural markets will be important,” the study stated. “Antitrust enforcement, if a market can support multiple hospitals (with important service lines), is a valuable tool. In cases where competition is not viable, targeted financial support to preserve access is important and may need to be coupled with regulation to address market power concerns.”