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Each week, Health Affairs' Rob Lott brings you in-depth conversations with leading researchers and influencers shaping the big ideas in health policy and the health care industry.
A Health Podyssey goes beyond the pages of the health policy journal Health Affairs to tell stories behind the research and share policy implications. Learn how academics and economists frame their research questions and journey to the intersection of health, health care, and policy. Health policy nerds rejoice! This podcast is for you.
00;00;00;00 - 00;00;30;26
Alan Weil
Hello and welcome to “A Health Podyssey”. I'm your host, Alan Weil. Research conducted at the University of North Carolina, Chapel Hill, showed that as of 2019, about 9% of rural hospitals were considered to be at high risk of financial distress, a figure that had grown from 7% just four years earlier. Rates of distress were more than four times higher in the South than in the rest of the country.
00;00;31;11 - 00;00;54;25
Alan Weil
And various reports indicate that the COVID-19 pandemic has placed additional strain on the finances of rural hospitals. How do rural hospitals survive in this challenging environment? That's the topic of today's episode of “A Health Podyssey”. I'm here with Caitlin Carroll, assistant professor in the Division of Health Policy and Management at the University of Minnesota's School of Public Health.
00;00;55;13 - 00;01;24;20
Alan Weil
Dr. Carroll and coauthors published a paper in the April 2023 issue of Health Affairs, examining hospital survival in rural markets with a particular focus on hospitals in financial distress. They found that between 2010 and 2018, 77% of unprofitable hospitals continued to operate as usual, while 17% merged and 7% closed. We'll discuss these findings and their implications in today's episode.
00;01;25;08 - 00;01;27;12
Alan Weil
Dr. Carroll, welcome to the program.
00;01;28;03 - 00;01;28;28
Dr. Caitlin Carroll
Thank you for having me.
00;01;30;05 - 00;01;54;27
Alan Weil
This is a really important topic. It's been in the news. I'm eager to get deeper into it and what's really going on here. I gave a few basic statistics in my introduction, but let me just start by asking you, how would you describe the overall financial status of rural hospitals in the United States? And given the data that I read, which I think suggests that there are some challenges,
00;01;55;04 - 00;01;58;27
Alan Weil
what do you see as the reasons behind these challenges?
00;01;59;11 - 00;02;27;04
Dr. Caitlin Carroll
Sure, it's a great question. So rural hospitals in the U.S. are struggling financially. About a third of rural hospitals are unprofitable. And as you mentioned, this financial distress is growing over time. In terms of maintaining profitability, there's two core challenges for rural hospitals. The first challenge is low patient volume. Rural hospitals have experienced large decreases in demand for care.
00;02;27;13 - 00;02;58;07
Dr. Caitlin Carroll
That's for a couple of reasons. One is that populations are declining in rural areas. There's also been a shift from inpatient care to the outpatient setting, in particular ambulatory care. There's also been a tendency of rural residents to bypass their local hospital and go to larger urban facilities. So when volumes get low, patient volumes get low at rural hospitals, it becomes very difficult to cover the cost of delivering care, especially because fixed costs at hospitals are so high.
00;02;58;21 - 00;03;25;22
Dr. Caitlin Carroll
So if you're a rural hospital and you treat a handful of patients per day, it's very difficult to cover the full cost of the facility. The second challenge for rural hospitals is they tend to be more reliant on public payers, for example, Medicare, and they have fewer patients that have commercial insurance. That's important for profitability because commercial insurers tend to pay more than Medicare for the same services.
00;03;26;17 - 00;03;49;00
Dr. Caitlin Carroll
So if you think about rural hospitals having sort of a low number of patients per day and the lower reimbursement per patient on average, this leads to significant financial distress. And this has obviously raised concerns about access to care and the state of competition in rural hospital markets because financial distress can increase the risk of closure and merger.
00;03;50;03 - 00;04;11;16
Alan Weil
So that's a really clear description of why we're at this point. And the first of the category of reasons you gave, the dynamics really are continuing to be negative. I mean, the move outside of the hospital, the move to bypass the local hospital. These trends are going to continue. We have no reason to think they won't. And so the picture isn't very good.
00;04;12;25 - 00;04;21;11
Alan Weil
So what were you trying to understand beyond that sort of baseline, “it's challenging”? What were you trying to understand when you conducted the research that we published?
00;04;22;16 - 00;04;48;24
Dr. Caitlin Carroll
Yeah. So at a high level, we really wanted to know what happens to unprofitable hospitals that are operating in rural markets, meaning markets where at least half the beds, the hospital beds are in rural areas. So in particular, we wanted to know, do unprofitable hospitals close? How often did they merge, either with a competitor in the same market or a hospital, you know, in a different market?
00;04;49;08 - 00;05;13;12
Dr. Caitlin Carroll
And how often do these hospitals stay open and actually return to profitability? These questions, we think, have direct application to access to care and competition in rural markets. And each of the outcomes is important in its own way. So hospital closure is a key issue in rural areas. I imagine a lot of the listeners are familiar with this issue:
00;05;13;21 - 00;05;38;28
Dr. Caitlin Carroll
Closure decreases access to care. This is concerning because it leads to treatment delay and can lead to worse health outcomes for patients with time sensitive health conditions. Mergers in rural areas have gotten less attention, I would say, than closures, but are quite common and a serious issue to consider. There's two types of mergers that we want to think about in rural areas.
00;05;38;28 - 00;06;05;08
Dr. Caitlin Carroll
The first type is when two hospitals in the same market merge together. This type of merger is concerning in some cases because it can lead to market power and lead to higher prices. Mergers in rural areas, though, can also have benefits, for example, through the aggregation of patients into fewer, larger facilities. Having fewer facilities certainly helps with costs.
00;06;05;08 - 00;06;29;01
Dr. Caitlin Carroll
Costs go down if you close a hospital or you have hospitals merge. It can also help with quality. If you think that clinicians at the larger facility can benefit from having more practice or having access to better equipment. The second type of merger we need to think about is an out of market merger where two hospitals from different markets actually merge together.
00;06;29;08 - 00;07;00;05
Dr. Caitlin Carroll
This has become quite common with the growth of national and regional health systems. So again, there's trade offs. On the one hand, system affiliation improves funding at rural hospitals. It might help them stay open. But on the other hand, system affiliation, even these out of market mergers can lead to an increase in prices. In rural areas, there's also a concern that when a rural hospital is acquired, it might drain resources from the rural area.
00;07;00;06 - 00;07;05;03
Dr. Caitlin Carroll
For example, if a system decides to shut down service lines at the acquired hospital.
00;07;06;13 - 00;07;17;24
Alan Weil
Let's just do the top line. What did you find with respect to the different categories of behavior that you just described. When you look at these hospitals, what happens?
00;07;18;22 - 00;07;48;19
Dr. Caitlin Carroll
Yeah, so we studied rural hospitals that were unprofitable in 2010 and then we tracked what happened to them through 2018. So the first thing we find is that a minority of hospitals closed, about 7% of hospitals closed between 2010 and 2018. We also looked separately at hospitals, unprofitable hospitals that are in isolated areas. So hospitals that don't have any competitors nearby.
00;07;49;09 - 00;08;17;01
Dr. Caitlin Carroll
We wanted to think about this because policymakers are understandably concerned, you know, want access to care in these isolated rural areas. So we actually found that closure rates were lower among isolated rural hospitals. About 5% of them closed, compared to a higher 11% closure rate among hospitals that had some competitor nearby. So 7% of hospitals closed. That's the sort of high level result.
00;08;17;17 - 00;08;59;14
Dr. Caitlin Carroll
17% of hospitals merged. So a higher share of hospitals merged and they mostly merged with organizations that were outside of their local market. Right? So we're thinking about 13% of hospitals experience one of these out of market mergers compared to a lower 4%. Only 4% of hospitals merge with a competitor in their local market. So if 7% of hospitals close and 17% of hospitals merge, what we found is that the majority of unprofitable hospitals actually stayed open, you know, throughout the study period for this eight year study period, about 77% of them.
00;08;59;21 - 00;09;32;06
Dr. Caitlin Carroll
So this raises, we think, an interesting question of how did hospitals stay open? It turns out that about half of these hospitals were able to stay open without returning to profitability, meaning they still had these negative margins in 2018. It turns out that even though these hospitals were persistently unprofitable, they had negative margins throughout the study period, they had somewhat stronger measures of longer term financial health, which we measured using Altman scores.
00;09;32;06 - 00;10;00;18
Dr. Caitlin Carroll
And what an Altman score does is it combines the short term measures of profitability, sort of financial distress, for example, profitability, with longer term measures of financial health, like the value of assets relative to liability as accumulated earnings, things like that. So the fact that Altman scores stayed high throughout the study period suggests that these hospitals had some other financial resources to draw from other than short term profits.
00;10;01;06 - 00;10;37;21
Alan Weil
Well, this is quite a complicated picture, and it's good to get the first sense of what you found. Let's drill into some of the details behind these numbers. We’ll do that after we take a short break. And we're back. I'm speaking with Dr. Caitlin Carroll about hospitals in rural markets. Before the break, we got a very clear picture of the status of these hospitals that have been unprofitable.
00;10;38;24 - 00;11;01;04
Alan Weil
And now I want to spend some time with you trying to understand a little bit more about sort of what to make of all of this. So before the break, you gave a sense of how it is that a hospital that's sort of consistently unprofitable can keep its doors open. Which leads me to sort of wonder, are we even asking the right question?
00;11;01;04 - 00;11;11;04
Alan Weil
I mean, if it's possible to be open for so long when you're not profitable, then is profit the relevant metric?
00;11;12;01 - 00;11;33;13
Dr. Caitlin Carroll
Yeah, that is a great question. I think that, well, from a method standpoint, which if people want to get into the details of that they can get into the paper but, we did sort of think about financial distress in a couple of different ways. So we thought, okay, profitable versus unprofitable. We thought about high Altman score versus low
00;11;33;13 - 00;12;04;02
Dr. Caitlin Carroll
Altman score, things like that. So that's one thing to say. But I think the second is I don't think we want to understate the level of change that we saw between 2010 and 2018. So most hospitals stayed open. I think that, you know, is probably a good thing. Consolidation is tricky to manage, especially in rural areas. But 7% of hospitals closing and another 17% merging is a good chunk of hospitals in a relatively short time period.
00;12;04;12 - 00;12;18;29
Dr. Caitlin Carroll
So even though consolidation isn't, you know, happening, it's not like 100% of markets have consolidated over the last ten years. There's still a solid chunk. So I think that that we are seeing a good amount of change here.
00;12;19;17 - 00;12;46;23
Alan Weil
No, I'm really glad you point that out. That's right. I mean, it's easy to focus on, “Well, the biggest number is hospitals that stay open.” Almost a quarter are having a significant change in their structure is, that’s a big deal. So I think that's a very good place for us to focus. I am interested, as you describe some of the benefits and risks associated with the two different types of mergers in market and across market,
00;12;47;12 - 00;13;07;16
Alan Weil
is it still the case--well, and let me just add another dimension, which is the differential rates of closure for markets that had a smaller or a larger number of hospitals--would you say from a patient or resident perspective that it's unambiguously better for the hospital to merge than it is to close?
00;13;08;17 - 00;13;31;05
Dr. Caitlin Carroll
That's a great question. So let me back up for a second and talk about what we find when we compare sort of small versus large markets. So from an antitrust perspective, a key question is what's happening to rural markets that are served by these unprofitable hospitals? Are these markets consolidating over time?
00;13;33;06 - 00;14;01;23
Dr. Caitlin Carroll
And this is especially concerning in markets that are already small, which is a lot of rural markets, because any further consolidation can lead to market power, especially monopoly or duopoly power, for the remaining hospitals. So we found when we looked at rural markets that were served by unprofitable hospitals, almost half of them experienced some sort of market restructuring between 2010 and 2018.
00;14;01;23 - 00;14;26;27
Dr. Caitlin Carroll
So about 20% of markets lost a competitor to closure or within market merger, and out of market merger was even more common. About 30% of markets were affected by out of market merger. So, “How does this relate to the size of the underlying market?”, which was your original question. It turns out that closure and merger are less common in small markets.
00;14;27;08 - 00;14;57;00
Dr. Caitlin Carroll
So about 10% of small markets lost a competitor to closure or within market merger compared to 40% of larger markets. And we think of small markets as markets that had three or fewer competitors in 2010. Out of market merger was also less common in small markets. So we saw 30% of small markets had an out of market merger compared to 40% of larger markets.
00;14;58;11 - 00;15;22;08
Dr. Caitlin Carroll
So how should we compare these results? I think, you know, to some extent we think that the effects of consolidation should be greater in markets that are already small. So in that sense, it's good news that we're seeing most of the consolidation in the larger markets. And we're actually not seeing that many say, duopoly markets that are turning into monopoly markets.
00;15;22;23 - 00;15;39;08
Dr. Caitlin Carroll
On the other hand, you know, we’re seeing more and more markets move into this sort of small market category. So this suggests that we need some sort of regulatory framework, some sort of deal with these rural markets that are seeing fewer and fewer competitors.
00;15;40;19 - 00;16;00;16
Alan Weil
So that was a really helpful answer for me. And let me just try to say it back in my own terms, and you help me take it sort of to the next level. Well, what your data would suggest is that we've had what you might think of as market right sizing. Markets were already smaller, are more stable.
00;16;00;16 - 00;16;28;02
Alan Weil
Again, there's a lot of change, but they’re more stable. Markets that had more competitors, they are consolidating or closing and they're becoming, they're looking a little bit more like those other markets that were already smaller. And then the question is, are these small markets stable and or are we seeing a change that will lead us to stable small markets or in those markets, are we going to have things that we don't want like prices going up?
00;16;29;08 - 00;16;53;29
Alan Weil
So from an access perspective, maybe it's okay to go from 4 to 3 or 4 to 2 hospitals, but from a pricing perspective, that's kind of risky. So I guess my question to you, you're putting all of those pieces together, is, and you just moved right up to this in your last answer, how do we think about what to do about prices in these markets?
00;16;53;29 - 00;17;12;10
Alan Weil
At the outset, you mentioned that they're high fixed costs. If we want the hospitals to be there for access, they have to get covered. We don't want the prices to go up too much because someone has to pay for those. But if the hospitals aren't profit and we don't let the prices go up some, the hospital won't be there.
00;17;12;21 - 00;17;23;28
Alan Weil
So when you put all of these pieces together, how do you think about what public policy should do to balance the need for access and affordability? It's a very simple question.
00;17;25;26 - 00;17;49;28
Dr. Caitlin Carroll
And it's a great question that is seeking great answers. I think it will be really important moving forward to understand the effects of consolidation in rural areas. This is an area I think that's really ripe for more empirical work. It will be especially important to understand the effects of these out of market mergers, which we found were really common and they were really common even in the small markets.
00;17;49;28 - 00;18;16;17
Dr. Caitlin Carroll
We found 30% of those had an out of market merger. So small markets were not off the hook for these sort of expansion of systems. If we think about the literature on hospital consolidation more generally, not just in rural areas, there's clear evidence that mergers lead to market power and increased prices. So to some extent higher prices are bad and they reflect market power.
00;18;16;17 - 00;18;41;01
Dr. Caitlin Carroll
And we don't think of that as a good thing. But to some extent, higher prices might be warranted in isolated rural areas. For example, if they filter into higher profits and a reduced likelihood of closure. Certainly that won't be the case for all hospitals, but it may be the case for some. So that's a serious consideration when we think about antitrust regulation.
00;18;41;13 - 00;19;21;29
Dr. Caitlin Carroll
Price effects are not the only part of the story, and access is the other really big component. In rural areas, it's really important to ask, you know, what services are available in the rural area. And that's even separate from hospital closure, to your question earlier, like is merger always better than closure because it preserves access. Even if a rural hospital stays open, say, after it's acquired by a system, that system still might decide to close down service lines within the acquired hospital and divert patients to other hospitals in the system.
00;19;23;05 - 00;19;59;05
Dr. Caitlin Carroll
That could be a good thing in terms of quality of care if you think that patients are being diverted to a larger, more specialized facility. But, you know, it drains resources from the rural area and it also erodes access for patients that aren't able to travel. So a key issue in rural areas is how are we going to design a regulatory framework that deals with the anti-competitive effects of consolidation, for example, higher prices, but also enables access to care, especially access to high quality care.
00;20;00;00 - 00;20;33;22
Dr. Caitlin Carroll
And the kicker is we want to do both of these things while putting some reasonable limit on public subsidies for rural hospitals. Because if you think about a goal of keeping hospitals open, keeping rural hospitals open independently, that can be an expensive undertaking given the levels of financial distress. So in some cases it'll be worthwhile to subsidize rural hospitals, especially you could think about hospitals in isolated areas, but in other cases you've some consolidation may be warranted
00;20;33;29 - 00;20;38;25
Dr. Caitlin Carroll
if we can come up with an effective way to regulate that consolidated entity.
00;20;39;29 - 00;21;09;24
Alan Weil
Well, Dr. Carroll, you've done an amazing job, I think, in describing the dilemma here and the balance and the tradeoff, all of the terms we might use. We want to rely on markets where we can. These markets are fragile. The institutions in them are fragile. There are risks associated with letting the market power be exerted, and there are also risks with a regulatory approach getting the price wrong or the access points wrong.
00;21;10;15 - 00;21;26;27
Alan Weil
Sounds to me like you're going to have plenty of additional opportunity to add empirical data to these questions, but I really appreciate the clarity you've brought to the issue and framing what's at stake for publishing the paper and today for being my guest on “A Health Podyssey”.
00;21;28;03 - 00;21;28;28
Dr. Caitlin Carroll
Thank you for having me.