Financial Losses, Poor Assets Driving Closure Risks for Rural Hospitals

More than 600 rural hospitals are at risk of closing after consistently losing money on patient services and lacking net assets to offset these losses, according to data from the Center for Healthcare Quality and Payment Reform (CHQPR).

Between 2005 and 2019, over 150 rural hospitals closed, meaning many communities did not have access to a local hospital when the COVID-19 pandemic hit. Nineteen additional hospitals closed in 2020, followed by six closures in 2021 and 2022.

Pandemic-related financial assistance helped reduce the number of closures in 2021 and 2022, but the expiration of those funds will increase the risk of rural hospital closures in the near future, according to CHQPR.

More than 600 rural hospitals, representing nearly 30 percent of all rural hospitals in the country, are at risk of closing.

These hospitals have experienced persistent financial losses on patient services over multiple years. Inflation and workforce shortages will likely exacerbate these losses, especially for small rural hospitals. Grants, local tax revenues, and other profits that typically help rural hospitals offset financial losses on patient services may not be available in the future or be high enough to cover the losses.

Additionally, the rural hospitals do not have sufficient net assets to counteract the losses on patient services for more than six years.

In almost half of states, 25 percent or more of rural hospitals are at risk of closing. In 10 states, 40 percent or more are at risk. Mississippi has the highest number of rural hospitals at risk of closing at 24, followed by Tennessee with 17 hospitals.

The closure risk is greater for some hospitals, with more than 200 facilities at immediate risk of closing. These hospitals were losing money on patient services before the pandemic and have more debts than assets or sufficient net assets to offset their losses for only two to three years.

Rural hospitals are facing closure risks because they receive inadequate reimbursement to deliver services to their communities. It costs more to care for rural communities because of the smaller number of patients served, the brief noted.

Stakeholders and policymakers have proposed strategies to help rural hospitals stay afloat, but these will not necessarily prevent closures, according to CHQPR.

For example, converting rural hospitals to rural emergency hospitals would eliminate inpatient services, increasing financial losses and restricting access to inpatient care.

Expanding Medicaid eligibility would help low-income patients access care and reduce some of hospitals’ losses on uninsured patients, but most losses are from low payments for patients who have insurance.

Additionally, many low payments are from private health plans, indicating that an increase in Medicare reimbursement would only slightly increase margins at rural hospitals. Similarly, establishing a fixed budget may protect hospitals from revenue losses due to lower service volume, but it would not address cost increases and would prevent hospitals from delivering new services to their communities.

The biggest driver of negative margins at most small rural hospitals is low reimbursement from private health plans and Medicare Advantage plans, the brief stated. Therefore, one solution to prevent rural hospital closures would be for health plans to increase their payments to rural hospitals.

It would cost about $3 billion annually to prevent the closures, representing a less than one percent increase in total national healthcare spending. Spending would likely increase more if the rural hospitals closed, as reduced access to preventive care could lead to more severe health issues.

In addition, CHQPR said that rural hospitals need to receive standby capacity payments from public and private health plans in addition to service-based fees when delivering individual services.

“The standby capacity payment would support the fixed costs of essential services at the hospital, and service-based fees would cover the variable costs of those services,” the brief said.