Rural Hospitals: Here Today. Here Tomorrow?

The fate of these hospitals looks grim.

Rural hospitals have long been considered “on the edge.” They typically serve populations that are old, less affluent, and generally less healthy (a result of delayed healthcare, age-related diseases, and varying degrees of poverty). The patients these hospitals serve are more likely to require costly healthcare when they do present. These same patients are more likely to have Medicare or Medicaid unless they are self-pay. In short, rural hospitals are typically delivering expensive care with reimbursement that precludes significant positive margin. Those rural hospitals that do have positive margins often do so on local tax revenues or government grants.

COVID did not help.

The onset of the pandemic in 2020 flooded these hospitals with very sick, high-risk patients. The hospitals had a thorny dilemma: pay previously unheard-of rates for additional nursing and allied-health professionals or limit staffing and hence services. This was no small decision. In most rural communities, the hospital is the largest or second largest employer. The staff are integrated into the community. They are well-known and recognized at high school football games and the local grocery store. Many hospitals chose to pay usurious rates for staffing from agencies. Additional government funding allowed many of these hospitals to remain financially viable.

But then, January 2022 came. The most recent COVID surge was still underway. Expenses, including nursing and allied health, remained very high. But additional government funding essentially ceased. Hospitals trying desperately to maintain services to their communities were, once again, faced with the decision to continue or curtail. Many continued providing services hoping that there would be additional government support. For most, there wasn’t.

The surge finally ended. Contract labor costs remained high as hospitals tried to realign costs with revenue. Many nurses who left employed positions for agency positions did not return to their employed positions after agency work slowed.

Hospitals now faced a new human capital problem. Most were financially unable to continue using contract staffing but simultaneously were unable to fill vacant, employed positions. The “shallow” labor pool has been a long-term problem for rural hospitals. But now it was worse.

Compounding the obligate reduction in workforce was a concomitant reduction in revenue. As hospitals emerged from the most recent surge patients just didn’t seem to be returning in many rural areas. Maybe patients were delaying elective care. Maybe the contemporaneous rise in prices of other consumer good in spring and summer 2022 caused patients to re-evaluate healthcare needs in the context of gasoline exceeding $5/gallon. Perhaps it was just overwhelming economic uncertainty. A recent KaufmanHall report of over 900 hospitals indicated that operating margins are improving but remained persistently negative and are far short of pre-pandemic levels. KaufmanHall also notes that inflation is contributing to the negative margins as well.

So, what happens next? Some may be acquired. But for-profit hospital systems may not have the desire to take on obligate money-losing properties absent some compelling strategic value.

The hospitals in communities served by rural hospitals may never have strategic value, generate sufficient margin to attract buyers, or develop communities with political clout to receive adequate government support to remain open. Some, perhaps most, of the hospitals with the worst margins will simply close.

At the time of this writing the federal government appears to have little appetite for additional healthcare “bailouts.” The government wants to see the pandemic getting smaller in the rearview mirror. The fate of these hospitals looks grim. The fate of their communities looks grave.