Hospital Closures: A Gordian Knot

The acceleration of hospital closures in the United States indicates an evolving restructure of the healthcare delivery system. What are some of the effects on quality of care for patients, and what are the underlying forces causing hospitals to go under? Like everything involving healthcare, these are not easy questions to answer.

Hospital Closures

According to Brock Slabach of the National Rural Health Association, at this time there are 453 U.S. hospitals vulnerable to closure – and of these, 216, nearly half, are “highly vulnerable” to being forced to shut their doors. It is all a matter of money. The simple reality is that the costs of delivering healthcare are often more than what a hospital receives in reimbursement. As financing dries up, it’s time to close. After all, no one except the federal government can print money out of thin air.

The hospital crisis is unevenly distributed. Markets with smaller populations or hospitals with smaller market shares are most vulnerable to closing. In the past few years, around 200 hospitals have closed. Texas and Tennessee have lost more than 25 hospitals each in the last few years, mostly in small towns. In Missouri, since 2016, ten rural hospitals have closed down.

Nine out of these ten hospitals are located in the poorest counties in the southeastern region of that state. The once-robust buildings fall into disrepair. The paint begins to peel from the walls. Some are looted; some have their windows broken. In spite of hope, no help arrives. The infrastructure eventually falls apart to the point where it cannot be repaired.

To call a hospital a “healthcare delivery platform” is correct, but also highly misleading. Hospitals are human micro-societies. They are large clusters of caring people dedicated to serving their community. In a small town, almost every citizen has an emotional connection with the hospital. They may have been born there, or seen their children born there. Many of these hospitals have been built up over time by constant investment supplied by the local community.

Much construction has been subsidized by the townspeople. Local labor was used, and there was a feeling of contributing to posterity. Often, the hospital is the largest employer in an area. Hospital closures are a debilitating kick in the economic gut of a region.

Effect on Healthcare

Closures produce an immediate effect. The mean EMS response times for rural zip codes nearly double, and this is associated with what statisticians call “worse patient outcomes” – which is a euphemism meaning that people die. If there is a car wreck or a heart attack, it is a life-or-death matter, and an extra half-hour or so to get to the emergency room can be fatal. A study by Fleming shows that for residents of communities that lose their hospital, patients face a mean increase in travel time to care of about 30 minutes. With cardiac arrest, after 30 to 40 minutes without medical intervention, the chances of survival go way down. Some studies have calculated that a one-minute increase in EMS response time increases mortality by between 8 and 17 percent.

There are other more systemic effects as well. A study in Los Angeles County found that with an increased distance to the hospital for a patient, regular care is shifted away from emergency rooms and outpatient clinics to doctor’s offices. Lower-income residents report more difficulty getting care. Working-age persons are less likely to get HIV tests. Seniors are less likely to receive flu shots or other important vaccinations. There is higher infant mortality. There also are increased deaths from unintentional injuries and heart attacks.

Hospitals Holding the Bag

There is an astonishing amount of complexity in billing and in other functions of healthcare management, including forecasting. A wide range of rates exists because prices for reimbursements are negotiated one by one with individual insurers. This is the “free market,” so to speak, but in reality, the insurers tell the hospital what they are going to pay. With the government, there is no negotiation at all, simply a price list. But the patient cannot learn what their insurance is paying, presumably because these are business secrets. This obscurity and camouflage also works to defeat any proposed econometric analyses that could help illuminate a better way forward.

Hospitals are forced to bear a disproportionate amount of risk for payment when cost is shifted to the patient. There will be an estimated 450,000 individual bankruptcy filings by the end of the current year. Two-thirds of individual filings say that medical illnesses are the main cause of the financial disaster. They are unable to pay the out-of-pocket costs. With high-deductible plans and patients not able to pay, the hospitals are left holding the bag.

Medicare Reimbursements Distort the Market

Hospitals close when they run out of money. But they never run out of patients. Of the 150 or so different prices for each procedure, it is the federal government that is the stingy party at the bottom, paying out the least. No commercial insurance system pays less than the government. In fact, the government pays less than the cost of providing the services, and it does this on a regular and sustained basis. One study showed that Medicare margins of short-term acute-care hospitals from 2002 until 2019 declined from +2.2 to –8.75 percent. In spite of the geographic adjustments by the Centers for Medicare and Medicaid Services (CMS), in some metropolitan areas with high labor costs, the margins are even more negative.

The result is that for rural hospitals, or for urban hospitals located in poor areas, any patient on Medicare, Medicaid, or uninsured will cause the provider to lose money. Hospitals often need 140 percent of what is collected. In some states, it would take 1,200 percent more to make up the difference. Another problem is that government payments are very slow in coming, forcing further debt on the hospital.

These Medicare reimbursements distort the market because they are being subsidized by the commercial insurance payors. The range for reimbursements of commercial payors is said to be 3.5 to 10 times the cost of providing the service. In a RAND study of 4,000 hospitals, commercial insurance paid 224 percent of what Medicare pays. If one were a cynic, they would say “the best way to stop bankruptcy and closure of hospitals would be to get rid of Medicare,” or to force Medicare to pay the market rate for medical procedures.

Yet the market is moving in the other direction. Twenty years ago, 65 percent of individuals received their medical insurance coverage at work. That left the federal government to pick up the other 35 percent of patients. Now, the tables have turned, as more than one-half of patients are showing up with stingy government coverage. Today 65 million citizens are on Medicaid. This means the scale has tilted the other way, as less and less of the commercial insurance money is available to subsidize the government-financed patients.

What can the hospitals do? Some engage in capacity reductions, use of less technology, reduction in quality of service, and for some, closure. The subsidiary services such as EMS fare even worse. EMS is one of the lowest-paying jobs in the industry. In 2021, fully one-third of EMS personnel quit their jobs, leading to staffing shortages.

The more common response is to make up the differences by attempting to raise the reimbursement rates paid by commercial insurance providers. Insurance companies then make adjustments by raising premium rates and the amount of deductible out-of-pocket costs. But this has led citizens to go to the healthcare exchanges and search for plans, which, by government mandate, will not have such disabling expenses, but also pay out to the hospital the inadequate government rate.

Of course, canceling these giant government programs would leave many uninsured, but it also would give many individuals more options in commercial insurance. It also would stop the mass subsidization of the government-paid market by citizens who are paying high insurance rates on the commercial side to make up the difference. How many know that much of what they pay for their commercial insurance is used to subsidize the government? On the other hand, raising the payout rates for Medicare and Medicaid would simply put more strain on the government budget, which already is living on borrowed money. National health expenditures will soon reach 20 percent of GDP.

Private Equity Takeovers

Hospitals with a higher number of Medicare patients have lower profits and an increased chance of closing down or being taken over, usually by private equity investors. Studies show that hundreds of hospitals, thousands of physicians, and other healthcare entities such as nursing homes, ambulatory surgical centers, and fertility clinics have been taken over by private equity firms.

These financial money-grubbers and management gurus promise more efficiency, but studies have shown that hospital market competition is not always associated with improved outcomes for patients. Market forces do not automatically improve quality, and in fact, they may make it worse. Private equity solutions often force price increases for services provided, but show little in the way of improved quality of care. Sometimes there is a type of “takeover shock effect” in which immediately after the acquisition, there is a decrease in costs, but these soon rise back up to pre-merger levels (and yet the prices billed continue to be jacked up). When UnitedHealth and Sierra Nevada merged, Nevada markets soon were hit with a 13.7 percent increase in premiums. Observers concluded that mergers increase power of the insurance markets and lead to exploitation.

According to Marcus Higi, MD, “private equity is a cancer eating away at the delivery of quality and humane care of patients and those who provide care. The level of greed in the American medical system is unparalleled.”

Complexity and Choices

At the same time, the use of multiple payor systems adds incredible levels of complexity to the healthcare system. Remember the 150 different prices for each procedure? Himmelstein et. al. showed that in 2017, the cost of health insurance administration was $274.5 billion, or $844 per capita, in the United States, but only $5.6 billion, or $146 per capita, in Canada, which has a single-payor system.

In the end, the cost of healthcare in the United States is very high. Its system is the high-cost provider for the entire world. Hip replacements in the U.S. cost around $33,000, but average only $17,000 elsewhere; angioplasty is $32,000 in the U.S., but $13,000 elsewhere; C-Sections are $15,000, compared to $7,000 elsewhere, and appendectomies are $16,000, compared to an average of $7,000 elsewhere.

The cost of drugs has a similar pattern; Gilenya is $5,500 here, compared to an average of $2,200 in other countries; Copaxone $3,900, compared to $1,250; Geevec is $4,500, compared to $2,800 elsewhere.

Summary

In the United States, we spend much more on health but do not get a proportionate level of improvement.

What are the alternatives? Going over to the government side and hoping for a single-payor system is not very viable, because it is inadequate reimbursement that is bankrupting hospitals and causing closures, and also causing commercial medical insurance rates to keep increasing. But the private-sector side does not seem to work very well either, since people trained primarily in management and finance don’t seem to be very good at delivering quality healthcare. Perhaps there are other solutions, such as the commercial medical insurance providers also owning and running the hospitals. It is truly a Gordian knot.