Profits, Community Role, and Hospital Closure: An Urban and Rural Analysis

Abstract

The number of hospital closures increased substantially after the implementation of Medicare's Prospective Payment System (PPS). This acceleration in closures raised a number of concerns over current payment policies and their impact on access. This paper investigates hospital closures that occurred in 1985 through 1988. A hospital's financial status and mission or community standing were found to be determinants of hospital closure. Closed hospitals are much less likely to be publicly owned but more likely to offer fewer facilities and services, and have fewer cases. This may suggest that the patients directly affected by the closure can be absorbed by other hospitals or other nonhospital providers. Profitability is associated with the Medicare case-mix index and the share of Medicare patients. The findings also suggest that the case mix index may be rewarding some small hospitals in excess of the costs attributable to case-mix. For both urban and rural hospitals, a low share of Medicare patients increased the risk of hospital closure, independently of the relationship between Medicare share and profit. The share of Medicare patients also affected closure indirectly, through its effects on profit. Competition appears to affect the odds of closure through its effects on the number of cases. In addition, hospitals in areas with small or declining population are more at risk than other hospitals in both urban and rural areas.

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