Rural Hospitals Financial Losses, Closures, and Revenue

Part One of this report is an introduction to Losses, Revenue, and Costs incurred by Rural Hospitals. I have broken the report up so as to allow a reader some time to absorb the information on Rural Hospitals. It is a bit lengthy although it does have numerous graphs and charts. The report itself was developed and authored by the Center for Healthcare Quality and Payment reform and presented under the title “Saving Rural Hospitals.”

Primarily the issue? Smaller hospitals lack the funding to cover costs which you will see in the charts presented.

This part starts to lay the foundation of future problems with providing healthcare in rural communities. Any cuts in healthcare funding will cause greater issues for these hospitals which are $22 million to $42 million in size.

The Causes of Rural Hospital Problems, Saving Rural Hospitals

Center for Healthcare Quality and Payment Reform, CHQPR

Losses at Rural Hospitals That Closed

Most of the rural¹ hospitals that have closed were forced to do so because the hospital could not afford to pay for the staff and supplies needed to continue delivering services to patients. The rural hospitals that closed since 2012² had a median loss of 9% in the year prior to closure, and one-fourth had losses of 20% or more.³ In contrast, the majority of rural hospitals that have not closed have had small but positive total margins.⁴

Closures do not occur suddenly or because a hospital loses money in one single year. Instead, hospitals that close typically experience losses for several years and reach the point where they no longer have sufficient financial reserves available to cover their losses and no method of paying their staff or creditors.

In the rural hospitals that have closed since 2015, persistent annual losses in the years prior to closure had reduced the hospitals’ resources to the point where the majority had current liabilities that exceeded current assets⁵ in the year before they closed.

Several of the rural hospitals that closed were owned by EmpowerHMS, a company that was indicted for fraudulent billing.⁶ However, these were originally community hospitals that only became part of EmpowerHMS because the hospitals were struggling financially and EmpowerHMS promised to rescue them.⁷ Other hospitals that closed had been bought or managed by individuals or companies that had promised to address their financial problems but failed to do so.⁸

Losses at Hospitals That Have Not Closed

Although the majority of rural hospitals receive enough revenues to cover their costs, more than one-third do not. Over 700 rural hospitals lost money in 2023-24, and nearly 400 had losses greater than 5%. More than 300 rural hospitals had losses prior to the pandemic as well as in 2023.⁹

Large, persistent losses deplete a hospital’s financial reserves, making it more likely it will have unpaid bills and difficulties in making payroll. Rural hospitals with financial losses and low reserves are the most susceptible to closure.

Although a significant proportion of rural hospitals of all sizes are losing money, the size of the losses are higher among the smallest rural hospitals, i.e., those in the lowest quartile of annual expenses ($22 million in 2023).¹⁰

Hospitals that are losing money are at risk of closure, but even if a hospital does not close, large and persistent losses mean that the hospital will likely have to reduce the healthcare services it provides to the community. As a result, failure to address the significant financial problems facing the majority of these hospitals could lead to significant reductions in access to healthcare services for residents of many parts of the country.

Sources of Revenues in Rural Hospitals

Revenues at a hospital can be divided into four major categories:

• Health Insurance Plans: Since most patients have health insurance, the majority of revenues at every hospital comes from insurance plans. However, different insurance plans pay a hospital different amounts for the same service, and insurance plans pay different amounts for the same service at different hospitals. As a result, a hospital’s profitability will depend on the specific types of insurance its patients have and the amounts each of those plans pays the hospital for its services.
• Patients: Patients themselves are also an important source of revenue for hospitals. Obviously, if a patient has no insurance, the patient will be the primary payer for any services they receive. However, insured patients also serve as partial or even full payers for many of the services they receive because most health insurance plans require patients to pay copayments, co-insurance, and deductibles for services.¹¹ In addition, if a service is not covered by the patient’s insurance plan, the patient will be responsible for the full charge. If patients cannot afford to pay some or all of the amounts they owe, this will reduce a hospital’s overall margin on services.
• Government Funding: Many rural hospitals receive government appropriations or tax revenues that are intended to support the hospital’s operations but are not directly tied to specific services for individual patients. For example, a number of rural hospitals are organized as public hospital districts and raise revenues from local tax levies. Some states provide special grants to rural hospitals to offset losses from the provision of care to uninsured patients.¹²
• Non-Patient Service Activities: Finally, most hospitals will receive some revenues for activities that are not directly associated with the hospital’s own healthcare services, e.g., operating a cafeteria, a gift shop, or a parking lot. Depending on the costs incurred for these activities, they may generate either a net profit or a loss for the hospital. In addition, a hospital will receive earnings on any investments it has made, and it may also have to pay interest on loans or bonds; the net revenue from these interest earnings and payments increases the total margin at some hospitals and reduces it at others.

The most detailed data available on the types of revenues received by hospitals come from the cost reports hospitals submit to the Centers for Medicare and Medicaid Services (CMS) each year. The cost reports do not allow revenues to be fully disaggregated into the categories above, but they do allow the following categories of revenues to be analyzed:

• Health Insurance Plans:
  • Medicare Fee-For-Service: The most detailed information is available on payments associated with Medicare beneficiaries who are enrolled in “Original Medicare” (i.e., individuals who are enrolled in Medicare Part A and Part B and are not enrolled in a Medicare Advantage plan).¹³
  • Medicaid: The cost reports include the total amount the hospital receives for services delivered to patients on Medicaid. This includes both payments hospitals receive directly from the state Medicaid agency as well as payments received from the Medicaid Managed Care Organizations (MCOs) that serve as payment intermediaries in many states.¹⁴
  • CHIP and Indigent Care. Hospitals identify any payments for patients who are enrolled in Children’s Health Insurance Programs (CHIP) and state indigent care programs.
  • Private/Other Payers: The remaining revenue from patient services – i.e., the total net revenue the hospital receives for all patient services¹⁵ minus the payments in the four categories above – represents the total amount of payments received from three types of payers: (1) private insurance plans (including Medicare Advantage plans¹⁶), (2) other governmental insurance programs¹⁷, and (3) self-pay patients.¹⁸ Since most of the revenue in this category typically comes from private insurance plans and patients, the analyses below will generally refer to this category of payers as “private payers” and the patients as “private-pay patients.”
• Patients:
  • Patient Bad Debt: The cost reports do not distinguish how much of the revenue in the Private/Other Payers category comes directly from patients rather than insurance plans. However, the reports do include information on patient bad debt, i.e., what patients owe but fail to pay.¹⁹ This includes both unpaid amounts of cost-sharing for patients with insurance as well as unpaid amounts for uninsured patients who do not qualify for charity care. (Amounts that a health plan owes the hospital but does not pay are also considered bad debt on the hospital’s books, but these amounts are not included as “bad debt” on the Medicare cost reports.)
  • Uninsured Charity Care Patients: Hospitals report the amount of revenues they would have received for services they delivered to patients who did not have insurance and who met the hospital’s standards for charity care.²⁰
  • Other. Revenues that are not directly associated with patient services are reported separately on the cost reports. This includes payments from governmental sources that are intended to offset losses on patient services, but are not tied directly to the number or types of services that individual patients receive, such as local tax levies and state grants. However, hospitals vary in how they classify these payments, and many hospitals report all or most other revenues simply as “other revenue,” so it is impossible to reliably separate government grants, tax levies, etc. from other sources for all hospitals.

Private Insurance

More than half (50%-57%) of patient services are associated with patients insured by private insurance companies and patients who pay for their care directly. Only about 1/3 (27%-36%) of services are associated with patients who have coverage under Original Medicare. Medicaid represents less than 15% of the patient services at rural hospitals, and charity care represents less than 2% of rural hospital services.

A portion of the patients with private insurance are Medicare beneficiaries who have a Medicare Advantage plan, so the proportion of services delivered to Medicare beneficiaries is higher than what is shown in the chart. However, Medicare Advantage plans are private companies and they are not required to pay the same amounts or use the same methods of payment that are used for patients in “Original Medicare,” so the figure accurately represents the different categories of payers that support the hospital’s services.²¹

It is important to recognize, however, that even though the differences in payer mix between smaller and larger hospitals are relatively small on average, individual hospitals can have very different mixes of payers. For example, some hospitals have much larger percentages of Medicaid patients and/or uninsured patients, and this can cause greater financial losses for these hospitals. The proportion of Medicare beneficiaries who have selected a Medicare Advantage plan rather than Original Medicare varies significantly from state to state and also from county to county within individual states, and that can cause the proportion of patient services paid for directly by the Medicare program to vary significantly for individual hospitals. As will be discussed further below, this can have a significant impact on a hospital’s financial condition.

The vast majority of hospitals’ revenues and expenses are associated with services delivered to patients, so if a hospital is losing money overall, it is usually because the payments it receives for services are below the costs incurred in delivering services. However, many rural hospitals that are losing money on patient services receive a sufficient amount of money from taxes, grants, or profits on activities not directly related to patient services (e.g., a gift shop or parking lot) to offset those losses.

Other Revenue

This “other revenue,” i.e., revenue that is not directly tied to patient services, represented 14% of the total revenues at the smallest rural hospitals (those with less than $22 million in annual expenses), and 12% of revenues at rural hospitals with annual expenses between $22 million and $42 million, compared to less than 9% at larger rural hospitals.

During the pandemic, the proportion of rural hospitals’ total revenue coming from “other revenue” increased dramatically because of the large grants rural hospitals received from federal pandemic assistance programs. For example, in 2020, at rural hospitals with less than $22 million in annual revenue, an average of 20% of their total revenue came from sources other than patient services. This is discussed in more detail below in The Impact of the Pandemic on Rural Hospitals.Causes of Losses in Rural Hospitals

Understanding why some rural hospitals are losing money and why others are not requires determining not only how much each hospital receives from each category of payer, but how that revenue compares to the costs of the services the hospital delivered to the patients associated with that payer. Each category of payer described above can contribute either positively or negatively to the hospital’s overall profit or loss, depending on whether the amount paid was higher or lower than the cost of the associated services delivered by the hospital.

Measuring Payer-Specific Costs

Calculating payer-specific margins requires knowing not only the revenues the hospital receives from that payer but also the cost of the services received by the patients associated with that payer. These costs have to be estimated, and this is challenging to do accurately and fairly.

Measuring Payer-Specific Margins

The amount that each payer contributes to the hospital’s overall profit or loss can be measured in two ways:

• The margin (profit or loss) on the services delivered to the patients with a specific type of payer. The dollar amount of margin is determined by subtracting the estimated cost of the services delivered from the amount of revenue received from the payer.²⁶ The percentage margin is then determined by dividing that dollar margin by the cost of the services.²⁷ For example, if the margin on Original Medicare patients is -10% at a particular hospital, it means that Medicare paid 10% less than the cost of delivering the services patients with Original Medicare received at that hospital.
• The payer’s percentage contribution to the hospital’s total profit or loss. A large percentage profit or loss on a particular payer’s patients will only have a large impact on the hospital’s overall profitability if that payer insures a large percentage of the hospital’s patients. The contribution made by a particular payer to the hospital’s overall profitability is determined by comparing the dollar amount of profits and losses from that payer to the profits and losses from all of the other payers. To measure this, the dollar amount of margin associated with a payer is divided by the hospital’s total expenses, rather than just the cost associated with that payer’s patients.²⁸ For example, if services to Medicare patients represent 40% of the hospital’s total costs, then a -10% margin on the Medicare patients reduces the hospital’s overall margin by -4% (-10% times 40%).

Each of these two measures conveys different and important information:

• The first measure (margin on the payer’s patients) conveys the extent to which an individual payer is covering the costs of delivering services to its patients.
• The second measure (payer contribution to the hospital’s total margin) conveys the amount by which that payer is increasing or decreasing the hospital’s overall profitability.

Because of the large differences in the relative sizes of different categories of payers and the variations in payer mix across hospitals, the payers that generate the highest profits or losses on the first measure can turn out to be less important to the hospital’s overall profitability than the payers who insure the largest numbers of patients.²⁹