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JANUARY / FEBRUARY 2015 :: 76(1)
Rural Health in North Carolina

This issue of the NCMJ discusses factors that influence the well-being of residents in rural communities in North Carolina. These include factors related to health care, such as physician recruitment and retention, the effects of hospital closures, and the need for behavioral health services, and factors beyond the health care sphere, such as child care, health behaviors, economic development, and access to health services.


Financially Fragile Rural Hospitals: Mergers and Closures

Mark Holmes

N C Med J. 2015;76(1):37-40.PDF | TABLE OF CONTENTS

Rural hospitals serve as major sources of health care and employment for their communities, but recently they have been under increased financial stress. What are the causes of this stress, and how have hospitals and their communities responded?

I was raised in a small town in Michigan. I was lucky enough to have a hospital in my community, and we used it. I went there when I fell off my dresser at age 8 years, and we took my grandmother there after she fell down the stairs in our house. It was our hospital, and the community valued it. Like our school system and the fall festival, the hospital was a large part of who we were as a town.

Since 2010, however, there are at least 42 rural communities across the country—including 2 in North Carolina—that no longer have that resource. [Editor’s note: At the time this article was written, there had been 42 hospital closures since 2010; in the intervening months, at least 3 more hospitals have closed.] In some places, the hospital has been converted to another kind of health care facility, such as a long-term care facility or a clinic. In other communities, the building remains empty. The residents need to find another place to get their care, and if they need emergency care, they must hope to get to the next closest hospital quickly. Although hospital closures are nothing new, the recent pace is unprecedented; the National Rural Health Association has reported that the number of rural hospital closures in the past year was more than in the previous 15 years combined [1].

Why Are We Seeing More Rural Hospital Closures?
The number of rural hospital closures is accelerating for many reasons. The most commonly cited reason is the Patient Protection and Affordable Care Act of 2010 (ACA) and/or each state’s decision regarding Medicaid expansion. It is certainly true that rural hospitals generally depend on public insurance programs (Medicare and Medicaid) more than do urban hospitals. This is largely a result of the demographics of rural communities, which are generally poorer and more elderly than urban areas, but we also know that commercially insured residents (whose care can generate higher reimbursement for the hospital) are more likely to bypass their local hospital [2]. In other words, rural hospitals face a compounded reimbursement challenge—a lower reimbursement market combined with the fact that those whose care could yield higher reimbursement are more likely to go to a different hospital.

Rural populations are generally more likely to be uninsured, and the execution of 2 of the most visible coverage provisions of the ACA—the insurance marketplace and Medicaid expansion—have generally exacerbated this coverage disparity. Early estimates suggest that, despite higher eligibility, rural populations had lower take-up rates in the federally facilitated marketplace, and state-specific decisions to expand Medicaid have generally been more common in states that are more predominantly urban; that is, rural states have been less likely to expand Medicaid, meaning rural hospitals have been less likely to see an increase in coverage [3]. Furthermore, more rural hospitals have closed in states that have not expanded Medicaid (N = 33) than in those that have (N = 9) [4]. Although there are more rural hospitals in states that have not expanded Medicare than in states that have, the closure rate is higher in the former group (2.3% versus 1.0%) [4, 5]. It is important to note, however, that Southern states have seen the bulk of hospital closures, and those states have been less likely to expand Medicaid. Thus it is difficult to accurately determine whether it is the expansion decision per se that has led to higher closure rates, or whether states that have not expanded Medicaid have other factors leading to higher closure rates; this is an important question on which many researchers are currently working.

Other factors are important contributors too. Rural hospitals have long been some of the most financially fragile hospitals. In study after study, we have found that rural hospitals—especially the smallest rural hospitals—have the lowest profitability and liquidity, meaning they are financially fragile [6]. In other words, many of those hospitals that have closed were struggling for years, and recent policy changes (such as a cut in Medicare reimbursement) were enough to push them into closure. “Health reform” is sometimes used synonymously with “the ACA,” but market-based health reform was moving ahead well before the ACA was enacted. For example, accountable care organizations (ACOs) are often viewed as one of the key provisions of the ACA, and they were thought to be one of the means through which Medicare would bend the cost curve. But by the time Medicare announced its first Pioneer ACOs, 150 private ACOs were already operating [7].

Market-based health reforms had started before the ACA was enacted and have continued since. These reforms have spurred a consolidation in the health care industry—especially hospitals—and many rural hospitals have been merged or acquired. Meanwhile, other trends such as a population decrease in rural areas and a shift away from acute care in the inpatient setting have been disadvantageous for rural hospitals, as they have led to shrinking markets.

Mergers and Hospital Closures
When a hospital is financially challenged, it may sometimes merge with (or be acquired by) a larger hospital system. A recent study during the 2005–2012 period found that hospitals with lower profitability and higher debt—that is, financially fragile hospitals—were more likely to merge [8]. Merging hospitals experienced a decrease in operating margin—meaning they were even less profitable—and generally they had lower salary expenses, likely as a result of eliminated management positions. Thus, even though a challenged hospital may find that a merger is a viable option, its finances generally worsen after a merger, and some of the best-paying management positions—and, likely, the community-mindedness of the hospital—may evaporate. It is too early to tell whether these merged hospitals are more likely to close.

Unsurprisingly, a hospital closure generally has a negative effect on the community. Access to care is diminished, which can sometimes lead to visible, real, and personal costs, such as a death due to delay in receiving care. There are also economic effects of hospital closures. A hospital is often one of the largest employers in a rural community, and previous research has shown that a closure leads to a short-run decrease in per-capita income and an increase in the unemployment rate [9]. If a community loses its only hospital, the cost can be permanent; one estimate suggests this cost is a $703 decrease in the per-capita income of a community (in 1990 dollars—approximately $1,300 today) [9]. Given the average rural county population, this translates to roughly $30 million lost from rural county residents as the result of a closed hospital.

Because of these costs, the North Carolina Rural Health Research Program is tracking rural hospital closures across the country (See Figure 1). Although many such closures are covered in news media, not all are. Therefore, news alerts are supplemented by data-sharing partnerships with the National Rural Health Association and the Office of Rural Health Policy, along with state associations and other stakeholders, which allow us to include as many rural hospital closures as can be identified. A map indicates known rural hospital closures and contains key information on each closure, including what the building has become (eg, a long-term care facility, free-standing emergency department, or school). If you want to find out more, or if you know of a hospital closure, visit to see the most up-to-date map and list of hospitals.

Potential conflicts of interest. M.H. has no relevant conflicts of interest.

1. Morgan A. Rural hospitals closing at alarming rate. Rural Health Voices website. Accessed November 12, 2014.

2. Radcliff TA, Brasure M, Moscovice IS, Stensland JT. Understanding rural hospital bypass behavior. J Rural Health. 2003;19(3):252-259.

3. Holmes M, Silberman P, Thompson K, Freeman V, Randolph RK. Geographic Variation in Plan Uptake in the Federally Facilitated Marketplace. NC Rural Health Research Program Findings Brief. Revised October 2014. Accessed December 12, 2014.

4. Kaiser Family Foundation. Status of state action on the Medicaid expansion decision. Kaiser Family Foundation website. Accessed August 28, 2014.

5. Centers for Medicare & Medicaid Services (CMS). Provider of Services File. CMS website. Accessed December 18, 2014.

6. Holmes GM, Pink GH, Friedman SA. The financial performance of rural hospitals and implications for elimination of the Critical Access Hospital program. J Rural Health. 2013;29(2):140-149.

7. Muhlestein D. Continued growth of public and private Accountable Care Organizations. Health Affairs website. Accessed November 12, 2014.

8. Noles M, Reiter KL, Pink GH, Holmes M. Rural Hospital Mergers and Acquisitions: Who Is Being Acquired and What Happens Afterward? Chapel Hill, NC; North Carolina Rural Health Research Program: 2014. Accessed November 21, 2014.

9. Holmes GM, Slifkin RT, Randolph RK, Poley S. The effect of rural hospital closures on community economic health. Health Serv Res. 2006;41(2):467-485.

Mark Holmes, PhD director, North Carolina Rural Health Research Program, Cecil G. Sheps Center for Health Services Research, University of North Carolina at Chapel Hill; associate professor, Department of Health Policy and Management, UNC Gillings School of Global Public Health, University of North Carolina at Chapel Hill, Chapel Hill, North Carolina.

Address correspondence to Dr. Mark Holmes, North Carolina Rural Health Research Program, 725 Martin Luther King Blvd, Chapel Hill, NC 27599-7590 (