By Clarissa Donnelly-DeRoven
Since 2005, 181 rural hospitals across the country have shut their doors permanently — 56 of those between 2017 and 2020.
Scholars at the North Carolina Rural Health Research Program and the Cecil G. Sheps Center for Health Services Research at UNC Chapel Hill watch the issue closely. Two researchers recently decided to investigate: did the most recent closures have anything in common financially?
The answer they found was a resounding yes. In the year before their closure, most of the now-closed rural hospitals nationwide had low cash on hand, negative operating margins, and negative total margins, compared to rural hospitals that stayed open.
George Pink, one of the authors, says the study is the first he’s seen to analyze a hospital’s finances in the immediate years before its closure.
“We just wanted to get a handle on the hospitals that did close, compared to hospitals that did not close,” he said. “How were they different?”
Of the 56 hospitals that closed, 47 had less than a month’s cash on hand in the year before it closed. “Cash on hand” is a critical financial indicator that measures how many days a hospital could pay for its operating expenses with the money it has immediately available. Having little or no cash on hand indicates that an organization can’t really absorb some unexpected financial shock, in the case of a hospital that could be a surge of patients or an essential repair.
The other two measures — operating margin and total margin — can be a bit more complicated.
“When we talk sources of revenue to hospitals, we generally talk about two pots of money: operating revenue and non-operating revenue,” Pink said. “Operating revenue is revenue received for patient care — inpatient, outpatient, whatever the source. Whatever payers give you for patient care, that is called operating revenue.
“Non-operating revenue is revenue for activities that are not related to patient care, so, for example, the largest source of non-operating revenue is typically investment income.”
Among the hospitals that closed, 49 had negative operating margins in their final year of operation and 50 had negative total margins (which includes both operating and non-operating revenue).
“There’s a lot of commentary out there as to why these rural hospitals are closing,” Pink said. Many pin the blame for closures on large health systems, which buy up these smaller facilities and then close the hospitals when they consolidate services.
Something like that could be to blame for the closure in those facilities that are outliers in the data, the researchers didn’t look at those facilities specifically.
But, “By far, those are very small numbers,” Pink said. “The overwhelming percentage of the majority of them closed for financial reasons.”
The hope is that officials from state rural health offices could make it a practice to look at these financial indicators, which would enable them to identify hospitals that are at high risk of closure and implement measures to prevent the closure.
This particular study didn’t examine the role Medicaid expansion might play in preventing rural hospital closures, but a 2018 Health Affairs study by Colorado researchers — which relies on data from the Sheps Center — found that the program makes a significant difference.
Because Medicaid expansion increases the number of people with insurance coverage — thereby decreasing the amount of uncompensated care hospitals provide — those institutions perform better financially and are less likely to close, “especially in rural markets and counties with large numbers of uninsured adults before Medicaid expansion,” the authors wrote.
North Carolina remains one of 12 states to not expand Medicaid, though the state budget created a new 18-member committee in the general assembly to study health care access and Medicaid expansion.
Some federal relief could be coming for rural hospitals in states such as North Carolina. In December 2020, Congress passed the Consolidated Appropriations Act of 2021. The law creates the “Rural Emergency Hospital,” a new type of facility that will not provide inpatient services but will offer 24-hour emergency care. The law passed in response to the rate of rural hospital closures, and the negative impacts the closures have had on the health of communities.
“During the past decade, policymakers have recognized that rural communities need options other than full-service hospitals, to ensure access to essential services,” wrote staff members from the National Advisory Committee on Rural Health and Human Services in an October 2021 policy brief on the new designation of care facility. “The [new law] created the [rural emergency hospital] provider type to give rural communities with struggling rural hospitals an option between a traditional acute-care hospital and complete closure.”
The details of the new system are still being worked out. The federal Centers for Medicare and Medicaid Services are expected to have finalized the model by 2023, which is when hospitals can begin converting.
Pink, who provided his expertise to the committee, argues that his study “reinforces the need for a new model of rural health care, such as the proposed rural emergency hospital.”
“It’s just an example of a new model that probably is long overdue,” he said.