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Unprofitable rural hospitals often merge with health systems, helping them stay open but also increasing the likelihood of price hikes for services.
Between 2010 and 2018, 17% of unprofitable rural hospitals merged with another organization while 7% closed, according to an analysis of data from 325 unprofitable hospitals. Of the financially unstable hospitals that didn’t close or consolidate, about half became profitable over that span, according to a study published Monday in Health Affairs.
“System affiliation can improve funding at rural hospitals and potentially help them stay open,” said Caitlin Carroll, assistant professor of health policy at the University of Minnesota and lead author of the study. “But on the other hand, even out-of-market mergers can raise prices and drain resources from the local community if services are eliminated and patients are redirected to out-of-market providers.”
Four rural hospitals have already closed this year, fueling discussions around policy changes and proposed legislation. More rural hospitals are expected to cut services, merge or close as they manage higher labor costs and reimbursement cuts. Policymakers are left with a difficult proposition: maintaining access to care in sparsely populated communities while putting guardrails around systems’ growing market power.
“Right now, the rural hospital market is hemorrhaging,” said Eric Shell, a principal with the consultancy Stroudwater Associates who specializes in rural healthcare.
Many rural hospitals are soliciting potential partners as their volumes stagnate or decline and they struggle to attract and maintain clinicians. One of the reasons why rural hospitals seek out larger systems is to increase their negotiating leverage with insurers, Shell said.
“That begs the question: If third-party payers pay everyone fairly, would that affiliation be necessary?” he said.
COVID-19 relief funding and policy changes instituted during the public health emergency helped reduce the number of rural hospital closures. There were only 10 rural hospital closures in 2021 and 2022, down from an average of 13 a year from 2012 through 2020, according to data from the University of North Carolina.
Dozens of facilities are expected to convert to rural emergency hospitals, which would eliminate their inpatient beds in exchange for a 5% boost to Medicare outpatient reimbursement and an average facility fee payment of $3.3 million a year. The $1.7 trillion spending bill passed in December included a two-year extension of an add-on Medicare payment adjustment of up to 25% per discharge for low-volume hospitals.
While the spending bill slowed Medicare reimbursement cuts, Medicare payment reductions via sequestration and the Pay-As-You-Go Act are expected to acutely affect rural hospitals that typically treat fewer commercially insured patients than urban providers.
If rural hospitals can find a merger partner, some have to file certificates of public advantage, which allow health systems to skirt federal antitrust regulation in exchange for state oversight. While well-designed COPAs can limit prices and other anticompetitive effects, the laws may also give the merged entity the lobbying power to weaken regulations over time, the study’s researchers said.
“They are very flexible. Like most policies, design, implementation and enforcement are crucial,” Michael Chernew, a healthcare policy professor at Harvard University and co-author of the study, said in an email. “There certainly can be unintended consequences.”
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