Study: Rural Hospitals’ Financial Viability Is Mixed, Challenging

June 2, 2020
A study published in the June issue of Health Affairs finds rural hospitals facing a variety of challenges, including some unique to them, that will keep their financial stability in doubt in the near future

The current financial status of rural hospitals in the United States remains one of great concern. That fact was documented in research conducted by four healthcare researchers, and published in the June issue of Health Affairs. Ge Bai, Farah Yehia, Wei Chen, and Gerard F. Anderson examined the finances of 1,004 rural U.S. hospitals, in an article entitled “Varying Trends In The Financial Viability of US Rural Hospitals, 2011-17.”

As the researchers write, “The financial viability of rural hospitals has been a matter of serious concern, with ongoing closures affecting rural residents’ access to medical services. We examined the financial viability of 1,004 US rural hospitals that had consistent rural status in 2011–17. The median overall profit margin improved for nonprofit critical access hospitals (from 2.5 percent to 3.2 percent) but declined for other hospitals (from 3.0 percent to 2.6 percent for nonprofit non–critical access hospitals, from 3.2 percent to 0.4 percent for for-profit critical access hospitals, and from 5.7 percent to 1.6 percent for for-profit non–critical access hospitals). Occupancy rate and charge markup were positively associated with overall margins: In 2017 hospitals with low versus high occupancy rates had median overall profit margins of 0.1 percent versus 4.7 percent, and hospitals with low versus high charge markups had median overall margins of 1.8 percent versus 3.5 percent.” Further, “Rural hospital financial viability deteriorated in states that did not expand eligibility for Medicaid and was lower in the South. Rural hospitals that closed during the study period had a median overall profit margin of −3.2 percent in their final year before closure. Policy makers should compare the incremental cost of providing essential services between hospitals and other settings to balance access and efficiency.”

The researchers note that, despite the critical access hospital designation given by the Centers for Medicare and Medicaid Services (CMS) to a variety of rural hospitals since 1997, and their reimbursement at cost for treating Medicare patients, “[F]inancial distress has remained prevalent among rural hospitals and has led to hospital closures, limiting rural residents’ access to hospital services and affecting the clinical and financial well-being of local communities.” Indeed, “Since 2005, 170 rural hospitals have closed, and the rate of closure has been increasing. For-profit rural hospitals have been affected more severely than nonprofit or government hospitals have been, and closures have occurred more often in the South than in other regions.”

Distressingly, they report that, “Except for nonprofit critical access hospitals, the median overall margin of rural hospitals declined during the study period, 2011–17. The median overall margin of rural nonprofit critical access hospitals increased from 2.5 percent to 3.2 percent, while that of rural nonprofit non–critical access hospitals, for-profit critical access hospitals, and for-profit non–critical access hospitals decreased from 3.0 percent to 2.6 percent, 3.2 percent to 0.4 percent, and 5.7 percent to 1.6 percent, respectively.”

Further, “The change in the proportion of profitable rural hospitals (those with positive overall margins) demonstrated a similar pattern. The proportion of profitable critical access hospitals remained steady, at around 67 percent (appendix exhibit A3).22 In contrast, the proportion among nonprofit non–critical access hospitals, for-profit critical access hospitals, and for-profit non–critical access hospitals shrank from 71 percent to 65 percent, 69 percent to 52 percent, and 70 percent to 57 percent, respectively. Overall, the financial viability of for-profit rural hospitals declined more rapidly than did that of nonprofit rural hospitals.”

Importantly, the article’s authors note, “We found that for-profit rural hospitals faced more financial distress than nonprofit rural hospitals did, which is consistent with the results from previous literature on rural hospital financing.8 It was beyond the scope of our study to identify the mechanism underlying this difference, but it may be attributable to differences in service offerings, efficiencies, and tax-exempt status.” And, “The robust positive association between occupancy rate and financial viability suggests a unique challenge for rural hospitals. Reimbursements from public and private payers (except for the Medicare reimbursement to critical access hospitals) do not compensate for fixed costs associated with providing standby capacity, which is essential in rural communities, where few hospitals serve large geographic areas. The provision of standby capacity for remote and less populated rural communities comes at the cost of financial viability for rural hospitals.”