Affiliation Boosts Rural Hospital Margins, But Reduces Care Access

December 04, 2019 - Affiliating with a health system prevents rural hospital closures by improving margins, but the partnership comes at a price, according to a new study from RAND Corporation.

The study published in the December 2019 edition of Health Affairs found affiliating rural hospitals, which had negative mean operating margins at baseline, significantly improved their financial standing compared to non-affiliating rural hospitals. However, the hospitals also saw a reduction in key service lines, including obstetric and primary care, as well as in non-emergency outpatient visits.

“Although health system affiliation may help prevent the closure of rural hospitals or their conversion to subacute care facilities if operating margin is a critical determinant, this may come at the cost of loss of access to certain services,” the authors wrote.

To determine the impact affiliation had on rural hospital performance, the study compared rural hospitals that affiliated with a health system between 2008 and 2017 with those that did not on 12 measures related to structure, utilization, financial performance, and quality. The study included 994 rural hospitals that were never affiliated with a health system during the period and 306 that went from unaffiliated to affiliated from 2009 to 2017.

The study showed affiliation had a positive impact on rural hospital financial performance. Mean operating margins increased significantly following an affiliation, by 1.6 to 3.6 percentage points in years two through five of the study.

However, the increase in operating margins was not linked to greater utilization at the rural hospital or a reduction in uncompensated or unreimbursed care, the study’s authors pointed out. Affiliating rural hospitals actually experienced decreased outpatient utilization, which fell by 10,000 to 21,000 non-emergency visits per year compared to non-affiliating rural hospitals.

Rural hospitals also experienced reductions in certain services. Specifically, affiliating rural hospitals decreased the number of on-site imaging modalities during the first three following affiliation, which translated to one-third of the affiliating hospitals removing one modality compared to non-affiliating rural hospitals.

Affiliating rural hospitals also experienced a reduction in the availability of obstetric services and the presence of primary care departments in five of the six years following affiliation, the study uncovered.

Health system affiliation, however, was not linked to changes in admissions and emergency department visits or patient experience and 30-day all-cause unplanned readmission rates.

The findings suggest that “the increased operating margins may be due to a combination of reduced provision of unprofitable services, increased prices, and improved efficiency,” the authors wrote. This raises concerns about provider consolidation in rural communities, they added.

Hospital merger and acquisition activity is high and continuing to grow, especially among rural hospitals. Researchers cited data from the North Carolina Rural Health Research Program at the University of North Carolina that showed mergers and acquisitions among rural hospitals increased from 10 to 30 deals per year in the 2000s to about 30 to 70 per year in the 2010s.

Previous studies have shown that hospital or health system affiliation rarely benefits the patient. For example, a cited analysis from Martin Gaynor, E.J. Barone University Professor of Economics and Health Policy at Heinz College at Carnegie Mellon University showed that consolidation leads to higher prices for patients.

“Given the potentially negative consequences of affiliation, policy makers should support mechanisms that help rural hospitals remain financially viable without it,” the study’s authors advised.

They advised policymakers to consider innovative payment models, like the global budgets used in Maryland and Pennsylvania, as well as expanding or creating hospital designations like the critical access hospital status. They also advocated for new forms of public-private partnerships between rural hospitals and their communities.

In areas where affiliations have already occurred, the authors suggested that policymakers “consider ways to alleviate its negative consequences.”

“As the trend toward health system affiliation shows no sign of slowing, there is a pressing need to understand its causes and ameliorate any negative consequences,” the study concluded.