For-Profit Rural Hospitals Face High Levels of Financial Distress

June 02, 2020 - For-profit rural hospitals were under more financial distress than their non-profit counterparts from 2011 to 2017, according to a new study in Health Affairs.

Conducted by researchers at Johns Hopkins Bloomberg School of Public Health, the longitudinal analysis of the financial viability of 1,004 US non-governmental, short-term general hospitals that had consistent rural status from 2011 through 2017 found that for-profit rural hospitals experienced sharper declines in profit margins.

During the period, the median overall profit margin for for-profit critical access hospitals declined from 3.2 percent to 0.4 percent. For-profit non-critical access hospitals faced a decline from 5.7 percent to 1.6 percent.

Non-profit non-critical access hospitals also faced lower profit margins during the period, but the median overall profit margin fell from 3.0 percent to just 2.6 percent. Meanwhile, non-profit critical access hospitals experienced a boost, from 2.5 percent to 3.2 percent.

Of the rural hospitals studied, 83.0 percent were non-profit, with 48.0 percent being non-profit critical access hospitals and 35.0 percent being non-profit non-critical access hospitals. Of the 17.0 percent that were for-profit, 4.0 percent were critical access hospitals and 13.0 percent were non-critical access hospitals.

It was beyond the scope of the study to pinpoint the reason behind the difference in profit margins, but researchers said potential drivers may be differences in service offerings, efficiencies, and tax-exempt status. For-profit hospitals pursue profit to maximize stakeholders’ wealth, while non-profits have a charitable mission. This divergence generally results in variations in productivity, efficiency, and service scope, they explained earlier in the study.

Beyond profit status, researchers also found a connection between a rural hospital’s financial distress and its occupancy rate and charge markup. The study showed:

• Hospitals with occupancy rates below 25.4 percent (the bottom third) had a median margin of 0.1 percent, and 50.0 percent of them were profitable, while hospitals with occupancy rates above 41.4 percent (the top third) had a median margin of 4.7 percent, and 79.0 percent of them were profitable
• Hospitals with charge markups below 204.6 percent (the bottom third) had a median overall margin of 1.8 percent, and 62 percent of them were profitable, while hospitals with charge markups above 327.7 (the top third) had a median overall margin of 3.5 percent, and 67 percent of them were profitable

Consistent with other studies, researchers also found that rural hospitals in the South had lower financial viability than hospitals in other states. They also reported that overall margin among rural critical access hospitals in states that expanded Medicaid improved during the period (from 1.8 percent to 3.7 percent for non-profit hospitals and from -0.6 percent to 1.4 percent for for-profit hospitals).

In contrast, the margin decreased among hospitals in states that did not expand Medicaid: from 3.5 percent to 2.8 percent for nonprofit critical access hospitals, from 3.5 percent to 2.6 percent for non-profit non-critical access hospitals, from 3.7 percent to 0.4 percent for for-profit critical access hospitals, and from 4.9 percent to 1.0 percent for for-profit non-critical access hospitals.

The study comes on the heels of a Guidehouse analysis that showed a quarter of rural hospitals are at high risk of closing unless financial standing improves, and that is up from 21 percent of rural hospitals the previous year.

Rural hospitals only account for about 30 percent of all hospitals operating in the US, with less than 2,000 nationwide, according to data from the American Hospital Association. However, the hospitals are the main source of care and oftentimes employment for about one in five Americans.

“Policy makers interested in balancing access to care in rural communities, the efficiency of care delivery, and the financial viability of rural hospitals should consider the trade-offs identified in this study and compare the incremental cost of providing various essential services between hospitals and other settings, such as emergency care,” researchers from Johns Hopkins concluded. “Finally, the cost-effectiveness of allowing strategic rural reclassification should be examined by federal regulators.”