The Hospital Closure Epidemic

March 28, 2016

Closed Sign

Never before have so many U.S. hospitals closed and declared bankruptcy in such a short time. Why are so many small and rural hospitals shutting their doors?

As of last year, 283 of the nation’s rural hospitals were at risk of closure, while 57 had shut down since 2010. No state is immune. Texas, Mississippi, Georgia, Oklahoma, New York, and Pennsylvania have all seen a rash of recent bankruptcies and closures. Not surprisingly, a recent report from iVantage Health Analytics reveals community hospital leaders’ no. 1 concern is financial challenges. These challenges come in four major forms:

  1. Medicaid Expansion: For the nation’s small and rural hospitals (especially critical- access hospitals) , the continued burden of un- and under-insured patients, coupled with the challenges of value-based payments, mean their razor-thin margins further erode. Rural hospitals are particularly vulnerable. Even in 2014, 66% were operating at a loss. Hospitals in states that have not expanded Medicaid are under even more financial pressure. In Medicaid expansion states, 8.5% of rural hospitals are at risk of closure, while in non-expansion states the rate is nearly double, at 16.5%.
  2. Slow Evolution: Financially stressed hospitals may not have the resources or the market focus to overcome legacy business practices and explore partnership opportunities. Transitioning away from fee-for-service reimbursement requires a shift in care philosophy. It also entails a change in focus to outpatient and post-acute care, which necessitates a robust plan to network with dedicated partners and sophisticated information technology infrastructure to support risk-sharing. Day-to-day financial struggles may preclude this kind of big-picture thinking, and downsizing bed capacity and staff to reduce financial pressure is politically unpopular.
  3. Demographic Challenges: Hospitals cannot control the population demographics in their regions. The cancellation of disproportionate payments eliminated a necessary subsidy for these facilities. A recent report indicates that between 2012 and 2015, critical-access hospitals saw their reimbursable bad debt plummet from 100% to 65%.Hospitals in middle-income neighborhoods may also suffer the consequences of high-deductible health plans for patients who don’t qualify for subsidies but can’t afford their deductibles. These challenges make physician recruitment difficult, because salaries become harder to fund and consistent specialist income may be elusive.
  4. The Consolidation Advantage: When smaller hospitals have been acquired by larger hospitals and health systems, they don’t feel the impact of the three challenges above to nearly the same degree. Large hospitals and health systems enjoy several advantages, which is why hospital CEOs expect continued consolidation and partnering to be one of the major trends for 2016. First, large organizations have a resource cushion to weather regulatory and market changes, and can right-size facility capacity to meet demand more easily. Second, they have an extensive provider network of coordinated care supported by a continuous patient record. Third, large can employ marketing initiatives to capture both value-based payments and revenue from higher-margin procedures. Fourth, their care network qualifies them for narrow-network inclusion, or enables them to manage their own health plans.

Why are so many hospitals suffering financial failure? Unprecedented financial pressures leave them unable to adapt to rapid market changes.

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