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Why So Many Hospitals Have Gone Out of Business

76 hospitals have completely shut down since 2011, including 20 in 2020

By Deborah Jeanne Sergeant

It seems nonsensical that hospitals should close. After all, there’s no shortage of people sick or injured.

But the Cecil G. Sheps Center for Health Services Research reports that since 2011, 76 hospitals have completely shut down, including 20 in 2020, the highest number ever.

Most of these facilities are in rural areas, which may sound like few people need them. However, 60 million people — almost 20% of the American population — rely on these providers for care.

George Chapman: “Unlike most industries, hospitals cannot raise their prices.”

George W. Chapman, owner of GW Chapman Consulting in Syracuse and columnist for In Good Health, provides medical practice consulting services to medical groups. He cited multiple reasons for the uptick in hospital closures, but the pandemic ramped up the rate.

“I think the first hit hospitals took was staffing,” Chapman said. “I think it resulted in a quarter of a million nurses who quit or retired.”

Many people assumed hospitals made money from the number of sick people during the pandemic. However, Chapman said that because hospitals’ reimbursement did not meet their expenses, the pandemic hurt hospitals financially.

The broken supply chain, along with increased need for personal protective equipment (PPE), caused expenses to skyrocket. Plus, as staff quit, hospitals had to bring in costly temporary traveling nurses and raise wages. Some travelers made as much as 50% more than local staffers.

Although travel nursing is not as popular as during and directly after the pandemic, the effect still sapped hospital budgets.

Low reimbursement from insurance companies and Medicare has also made it tough for hospitals. Chapman said that their payrates for physician services have remained relatively flat for 20 years.

“It’s tough to increase income without increasing volume,” he said.

Ethically, physicians can’t make unnecessary referrals to others in the hospital system. Chapman said that primary care providers make referrals for some issues because they’re swamped. Medicare auditors would catch frivolous referrals anyway.

Chapman views Medicare for all as the solution for hospitals receiving sufficient reimbursement.

“This is ridiculous with all the different insurances,” he said. “It’s tough to determine what benefits are and most consumers don’t understand what their benefits are. People with insurance still have high deductibles and copays. Medical debt is still the number one cause of bankruptcy.”

Eliminating insurance companies’ participation would also eliminate competition.

“You could have a Mexican standoff between providers and the government,” Chapman said, “or a strike. On the other hand, the government won’t let the hospitals all go bankrupt.”

He added that government-sourced financial help would make it easier for rural hospitals to remain open.

Signs that a hospital is probably struggling to stay open include reducing or eliminating its least profitable services, like obstetrics, which Chapman said typically only breaks even.

“Hospitals don’t make money on a normal, vaginal delivery,” he said. “OB–GYNs are the first to go.”

Another sign is that a hospital can’t recruit providers, which is especially true at rural hospitals. Many of these fill openings with rotating doctors.

They may also use more nurse practitioners and physician assistants.

“Unlike most industries, hospitals cannot raise their prices,” Chapman said. “Medicare and Medicaid set the rates and commercial insurance negotiates the rates. While hospitals are struggling with Medicaid and Medicare, that’s the most profitable line for commercial plans. Heavier use could be it. But insurance companies make boatloads of money off Medicaid and Medicare because they get paid by the government for each member. They take that money and then restrict what they’ll pay out. I don’t think they affect utilization of volume, but they can impact what they pay.”

He doesn’t think any area hospitals are thriving fiscally but just surviving. He added that when harder times come, the smaller, rural hospitals will be among the first to fold.