Why are Rural Hospitals Closing?

This post contains excerpts from the First Quarter 2019 Econ Focus article “Rural Hospital Closures and the Fifth District” by Emily Wavering Corcoran and Sonya Ravindranath Waddell.

Since 2005, 155 hospitals in rural America have closed. Eighteen of those closures were in the Fifth Federal Reserve District. The closures invariably changed health care access in their respective communities. Beyond that, the closure of anchor institutions–like hospitals–may affect community and economic development in rural areas. Why do we see hospitals in rural areas closing at a higher rate than at any time since the mid-1980s?

Rural Hospital Closures in the U.S. and the Fifth District

Across the United States, rural hospital closures have accelerated. (See chart below.) The number of annual closures has been highest in 2014, 2015, and 2019, with 16 closures. ("Closing" here means ceasing to provide general, short-term, acute inpatient care.) Two-thirds of rural hospital closures have been in the South, as defined by the census regions West South Central, East South Central, and South Atlantic.

Within the Fifth District, North Carolina has experienced the largest number of rural hospital closures, followed by South Carolina. (See chart below.) Maryland has been unaffected by rural hospital closures since 2005.

Causes of Rural Hospital Closures

The primary drivers of rural hospital closures are, in fact, economic. Rural hospitals have tighter profit margins than urban hospitals. Hospital revenue decreases are partly a result of medical advances that allow for more procedures to be performed as outpatient services. In many instances, this can reduce or eliminate the need for patients to receive hospital care. Rural employment and demographic trends have also contributed to financial strain — these trends include the loss of health insurance coverage as local mining, manufacturing, and agricultural employers leave rural areas and decreases in health care demand resulting from an overall population decline.

Furthermore, the cost of caring for patients without health insurance presents a challenge. Federal law requires hospitals to treat patients regardless of their ability to pay, which means all hospitals have some amount of uncompensated care. Hospitals with high levels of uncompensated care, formally known as Disproportionate-Share Hospitals (DSHs), receive federal financial assistance, although it only covers approximately 65 percent of total uncompensated costs. The 2010 Patient Protection and Affordable Care Act (ACA) was intended to reduce the federal government's financial assistance to DSHs on the assumption that more uninsured patients would have their services covered by Medicaid soon after the passage of the ACA. But as of mid-2019, 14 states have not expanded Medicaid (including North and South Carolina in the Fifth District).

What’s Next?

The high rate of rural hospital closures is not expected to slow anytime soon — instead, some analysis suggests that they may close at an even higher rate in coming years. Some 430 hospitals across 43 states are at a high financial risk of closing based on an assessment of their current financial viability. Together, these hospitals are major economic contributors to their communities, representing 21,547 staffed beds, 150,000 jobs, and $21.2 billion total patient revenue. Almost two-thirds of these hospitals are essential to the surrounding community, meaning they provide critical trauma care, serve vulnerable populations, are located in geographically isolated areas, or have a substantial economic impact on the local community.

Within the Fifth District, 21 rural hospitals in North Carolina, South Carolina, Virginia, and West Virginia face a high financial risk of closing. This represents nearly one in five rural hospitals in those states. Of additional concern is the fact that 14 of the rural hospitals at high risk of closing in North Carolina, South Carolina, and West Virginia are considered essential to their communities. West Virginia has the highest number of essential rural hospitals at high financial risk of closing, as eight of the state's 10 at-risk hospitals are considered essential to their communities.

What does this mean for rural communities? The way forward will inevitably vary by state. And, given the negative operating margins of most small rural hospitals, it seems likely that mergers, acquisitions, or closures of rural hospitals will continue. But partnership opportunities in rural health care also exist that could enable a hub-and-spoke network of providers to sustainably provide training and health care.

Closing any anchor institution has the potential to affect a community heavily — in the words of Richmond Fed President Tom Barkin, “[W]hen a rural hospital closes, much more than jobs are lost.” It is important, then, for policymakers and leaders at all levels of government to help rural hospitals succeed and, if a rural hospital must close, to help the community move forward.

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Views expressed are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.