Although health is priceless, health care costs money. As such, the institutions that deliver care are subject to economic forces. Financial considerations dictate whether they succeed or fail, with consequences, both good and bad, for costs, quality, and access.
In every year since 2011, more hospitals have closed than opened. Some closures are strategic decisions that accompany mergers and acquisitions. Others result from the inability to remain profitable.
Hospitals in some rural areas in particular face severe financial challenges. It is precisely in such areas where hospitals are more likely to close. For example, 15 of the 21 hospitals that closed in 2016 were in rural communities, and since 2010, nearly 90 rural hospitals have done so. Hundreds more are at risk of closure.
One source of financial challenges to rural hospitals is shrinking populations, which means fewer patients to fill beds. Although populations in urban counties have increased since 2000, those in half of rural counties have fallen. Shrinking populations also exacerbate other threats to rural hospitals’ finances. For example, care has been shifting from inpatient to outpatient settings. Although hospitals can and do have outpatient departments, those face competition for patients from nonhospital outpatient clinicians and facilities.
The decision by some states not to expand Medicaid also plays a role, according to a 2018 study in Health Affairs. The vast majority of recent hospital closings have been in states that have not done so. Instead of Medicaid picking up the tab for some of the hospital care for low-income populations in those states, that care remains uncompensated, a burden on hospital finances.
Analysis by the Center on Budget and Policy Priorities shows that uncompensated care burdens have declined more in states that expanded Medicaid. Likewise, a study by researchers at Northwestern University’s Kellogg School of Management found that hospitals in states that expanded Medicaid trimmed uncompensated care burdens by just over $6 billion.
Not just whether, but how states expand Medicaid can also affect hospital finances. For example, an analysis by the Commonwealth Fund found that Medicaid work requirements—approved or pending in 15 states—can weaken hospitals’ financial positions. As work requirements shrink Medicaid rolls, hospitals face greater uncompensated care costs.
Access and Economic Consequences
The most obvious consequence of a rural hospital closure is reduced access to hospital care for the population it served. Analysis by the Medicare Payment Advisory Commission found that about one-third of hospitals that closed since 2013 were more than 20 miles from the next closest hospital. This can increase the risk of bad outcomes for conditions requiring urgent care, including that for high-risk deliveries, trauma, and heart conditions. A recent study in JAMA, for example, found that loss of hospital-based obstetric services in rural areas is associated with more preterm births, putting greater risk on mother and child.
When a hospital closes, access to nonhospital care can also suffer because many specialists cluster around hospitals. In particular, when a rural hospital closes, mental health and substance use care are most likely to be in short supply.
Less obvious, but no less real, is that a hospital’s closure negatively impacts the economics of the community it served. When a hospital closes, all those it employed need to find other jobs. In addition, the jobs in related and supporting industries, including food and laundry services and construction, can also be lost. Those losses exert a downward impact on the local economy. As those directly affected become unemployed, they spend less, threatening the employment of others. All told, when a hospital closes, per capita income in its community declines by 4% and the unemployment rate rises 1.6 percentage points, according to findings published in Health Services Research.
The closure of a hospital also removes it as a competitor to other hospitals. One well-established consequence of lower hospital competition is increased hospital prices charged to commercial market payers. But a lesser known consequence is that less competition means lower quality.
That’s the conclusion of several studies and literature reviews. It’s been found most frequently in the context of government-set prices, as is found in Medicare. A simple explanation is that when hospitals aren’t able to compete for patients on price, they do so on quality. But that doesn’t occur in the face of insufficient competition.
This conclusion is also reached by studies focused on Britain’s National Health Service (NHS). Since 2006, NHS general practitioners have been required to provide patients with 5 hospital choices, along with quality information about each. NHS hospital payments are fixed and whichever hospital a patient chooses gets the payment. So, hospitals ended up competing on quality, according to one study that found that for every 10 percentage point decrease in hospital market concentration, 30-day mortality for heart attacks fell nearly 3%. This is consistent with other work also focused on the NHS, as well as several studies of Medicare.
But, not all closures may be problematic in this way. If they are in areas with more than enough hospital beds to satisfy the need for care, it’s possible closure can increase quality. For example, if the closing hospital offers relatively poorer quality care than nearby alternatives, patients may be better served by having to visit those other hospitals. For example, a 2015 Health Affairs study found no effect of hospital closures on mortality for Medicare patients, suggesting that consolidating services at larger hospitals can lead to quality improvements.
On balance, hospital closures in rural areas are both a source of concern and a perplexing challenge. Where populations are thin and in the context of changing patterns of care—shifting away from hospitals—what can be done to maintain adequate health care infrastructure for the most critical and urgent conditions?
Although there are a few programs that do assist rural hospitals (including, for example, the Critical Access Hospital Program, the 340B program, and a proposed wage index change), few are squarely focused on addressing their fiscal needs. Clearly, none are adequate to stem the loss of hospitals in some rural communities.
About the author: Austin B. Frakt, PhD, is the Director of the Partnered Evidence-based Policy Resource Center, Veterans Health Administration; an Associate Professor at Boston University’s School of Public Health; and an Adjunct Associate Professor with the Department of Health Policy and Management at the Harvard T.H. Chan School of Public Health. He blogs about health economics and policy at The Incidental Economist, tweets at @afrakt, and is a regular contributor fo the New York Times. The views expressed in this post are that of the author and do not necessarily reflect the position of the Department of Veterans Affairs, Boston University, or Harvard University. (Image: Doug Levy)
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