Consequences of Hospital Closures for the Health Insurance Industry in the United States

Abstract

Hospital and health system bankruptcies and closures continue to rise in the United States. They are troubling news not only for patients and communities but also for insurance companies. Hospital closures often lead to higher costs for insurers due to increased claim denials, delayed payments, reduced provider network and access to care, higher out-of-network costs, and a disruption of our healthcare system. These factors ultimately impact the health insurance companies’ bottom lines as well as their ability to manage patient care effectively with the risk of causing customer/patient dissatisfaction. Insurance companies can help prevent hospital closures, especially in rural areas, by implementing some of the following mechanisms: timely and adequate payments; improved patient-centric payment systems; and standby capacity payments to cover minimum fixed costs. Such early strategic investments have the potential to offset the higher costs for insurance companies associated with hospital closures and improve the sustainability of the U.S. healthcare system.

1. The Extent of Hospital Closures in the United States

Bankruptcies and closures, especially of rural hospitals, are no longer the rare exception in America [1]. Hospital closures increase the strain on the rest of the healthcare system including insurance companies [2].

A limiting factor in analyzing hospital closures in the United States is the fact that a single, dedicated “hospital closure database” does not exist. Comprehensive information on hospital closures can only be accessed by combining data from different sources, including the Centers for Medicare & Medicaid Services (CMS) Online Survey Certification and Reporting (OSCAR) system, the American Hospital Association (AHA), and state-level hospital databases.

According to the American Hospital Association (AHA), there were 6129 hospitals in the U.S. in 2023. Bankruptcies and closures of American hospitals and health systems substantially increased during the COVID-19 pandemic [3,4]. In 2020, more than three dozen hospitals entered bankruptcy [3]. According to Beckers Healthcare, in 2022, there were about 40 hospitals that filed for bankruptcy, closed, or announced plans to close in 2022 [5]. In 2023 and 2024, the number of hospital closures further increased, and by November 2024, it was reported that 23 hospitals (and emergency departments) had closed throughout the year [6].

Matters are particularly dire for rural hospitals; between 2005 and 2022, 186 rural hospitals closed [7]. A 2023 analysis of the financial vulnerability of rural hospitals by the Center for Healthcare Quality and Payment Reform (CHQPR) showed that 600 rural hospitals were at risk of closing. The most common risks were persistent financial challenges related to patient services or depleted financial resources [8]. A Beckers Healthcare report came to a similar conclusion by stating that in 2023, about 700 rural hospitals faced the continued risk of closing due to serious financial challenges [9].

2. Reasons for Hospital Closures

There are many reasons and correlations with causal links for why hospitals and health systems find themselves in distress [10].

There are financial issues such as declines in reimbursement, skyrocketing labor costs, low cash balances, inability to meet payroll obligations, unfunded pensions, professional liability or obligations, noncompliance with debt covenants, difficulty accessing debt, and high vendor debt [11]. These financial issues are often the result of a decline in patient volume and revenue, which is worsened by unfavorable payer contracts such as extensive bundling, electronic payment requirements through third parties, annual escalators, specialty pharmacy requirements, and too few commercial insurance patients. In addition, bad debt, a high percentage of “self-pays” (i.e., mostly “no-pays”), too much charity care, and too little non-operating revenue (e.g., declines in investment income or philanthropic donations) are also contributing factors [12]. In urban areas, local competitor(s) with deep pockets and increasing gains in the market share may also be a factor.

Patient issues include clinical quality concerns, misuse of healthcare interventions, inappropriately long lengths of stay, outdated technology or facilities, and low satisfaction scores. Workforce issues include leadership deficiencies, medical and nursing staff dissatisfaction, as well as physician and nurse shortages and difficulties in recruiting healthcare professionals.

The reasons for the recent surge in hospital closures are somewhat different from prior years. In particular, the COVID-19 pandemic has significantly contributed to hospital closures [8,9,10,11,12] by causing (1) a sharp decline in patient volume due to cancelled high-profit elective surgeries and (2) increased costs associated with treating very sick COVID-19 patients. Macroeconomic forces have had major impacts such as inflation, high interest rates with capital market constraints, labor and supply cost increases, Medicare cuts, and the unwinding and loss of Medicaid Continuous Patient Protection and Affordable Care Act (ACA) enrolment [13]. Despite its good intentions and successes, the requirements of the ACA, including the need for significant capital investments in IT and other areas, in combination with the pressures of declining reimbursement have caused multi-million-dollar losses and pushed many hospitals to the brink of bankruptcy [8,12]. Moreover, in the past, the Medicare and Medicaid Disproportionate Share Hospital (DSH) payments provided significant financial relief to safety net hospitals. But the ACA mandates a sizeable reduction in DSH payments, which has pushed primarily safety net hospitals directly to the brink of bankruptcy [14].

Unlike in primarily publicly funded healthcare systems like in Canada and the UK, governmental interventions at the state or federal levels concerning potential hospital closures basically do not occur in the U.S. due to its primarily privately funded health system. Hence, a master plan for the regionalization of healthcare facilities to absorb hospital closures and to guarantee continued levels of care does not exist.

3. Rural vs. Urban Hospital Closures

It is important to note that the location of hospital closures matters in that closures in rural (vs. urban) areas have a greater impact on patients and their community. Hospital closures in rural areas are often the result of regional differences due to demographics, population density, and access to healthcare. The closure of a (rural) hospital leads directly to a loss of access to medical care in a community and thus to the loss of a vital community health resource. Consequently, patients in rural areas are frequently forced to travel long distances for emergency or inpatient care [15]. When patients delay seeking care due to the inconvenience of traveling further, more severe health issues requiring more expensive treatments later may be the consequence. Also, if a closed hospital had served a specific demographic population, the remaining hospitals may see a sudden influx of new patients with different health needs, potentially impacting their service line and cost structure.

Hospital closures also have an adverse effect on local community business production and employment because the reduced hospital consumption of goods and labor negatively affects the local economy [16].

The negative consequences of hospital closures for patients and communities have all been well described, and it is generally accepted that hospital closures, or to use the deceptively positive term “hospital consolidations”, lead to both reduced access and lower quality of care [15,16].

4. Impact of Hospital Closures on the U.S. Health Insurance Industry

In contrast, little is known about the impact of hospital closures on the health insurance industry, yet the consequences are similarly alarming. In fact, insurance companies are affected in multiple ways.

Hospital closures, specifically in rural areas, create gaps in the insurance company’s provider network with a potential disruption of a region’s overall healthcare market. Hence, the location of the hospital closure matters. Closures in rural (vs. urban) areas have a greater impact on access to care and cost for insurance companies. Also, if a specialized hospital closes, it can create major challenges for patients requiring specific treatments, as well as higher and additional costs for insurance companies.

Hospital closures result in both patient dissatisfaction and higher out-of-network costs. The latter is also the consequence of patients needing to travel further for care (increasing transportation costs) and potentially seeking more expensive treatments at larger hospitals. Hence, both rural and urban hospital closures can lead to increased costs for commercially insured patients because patients are often forced to seek care at more expensive facilities or due to a smaller pool of available providers in the area.

Hospital closures also increase the insurance company’s administrative burden and cost since more time and resources are required to manage patient referrals to alternative providers. Moreover, from the insurance company’s perspective, hospital closures can lead to healthcare market instability due to a monopsony of the remaining hospitals. They can basically dictate prices for their services and hold substantial buying and bargaining power over insurance companies through market concentration. This makes the negotiations with the remaining hospitals more challenging and often more costly due to higher claims and costs submitted to the insurance companies. The fact that the pool of hospital providers to negotiate with is reduced results in higher reimbursement rates for the remaining hospitals in the area. Ultimately, premiums for insurance companies and their policyholders are negatively impacted. Higher premiums amplify the policyholders’ negative perception of their insurance company.

It is obvious that financially strong insurance companies are better equipped to manage the challenges associated with hospital closures. Concerning insurance plans, managed care plans that rely heavily on specific provider networks will be more severely affected by hospital closures compared to plans with broader networks.

Hence, it is not surprising that hospital closures significantly impact insurance companies by leading to higher costs. Consequently, there are fewer hospitals available in the network causing potential disruptions in patient care; the patient volume is increased at the remaining hospitals; and insurance companies are also faced with increased administrative burden. All these factors impact profitability and the ability to manage risk within the insurance plans.

Similarly, (f)ailing hospitals negatively impact insurance companies’ bottom lines for very similar reasons as do hospital closures. Financially struggling hospitals often invoke aggressive billing practices that lead to an increase in claim denials and disputes which, in turn, require more administrative work from the insurer to manage reviews and appeal denials. Hence, administrative costs are increased. Also, if such financially struggling hospitals delay the submission of claims or wait inappropriately long to receive payment from insurers, cash flow for the insurance company can be adversely impacted.

If a (f)ailing hospital is unable to collect payments from patients, insurance companies are often left to cover a larger portion of unpaid bills which increases their bad debt costs. If a (f)ailing hospital disrupts patient care by reducing services, patient access to necessary healthcare is more limited which leads to higher costs for insurance companies because affected patients may seek more expensive care elsewhere. Only if a (f)ailing hospital is in a highly competitive urban area with other providers, insurance companies may have leverage to negotiate favorable terms. However, this temporary advantage is usually outweighed by the overall negative effects.

5. How Private Insurance Companies Contribute to Hospital Closures

Unfortunately, insurance companies often contribute to the financial woes of struggling hospitals; treatment denials, payment delays, claims audits, and reimbursement cuts are just a few examples. Specifically, small, rural hospitals may not have the resources to fight claim denials or the financial buffer to absorb delayed payments.

For these reasons, it is important to turn “at-risk” hospitals and health systems around before they collapse. These hospitals are also often the largest employers and benefit the entire region. Alternative care options such as the availability of telehealth or other remote healthcare options can help mitigate some of the negative impacts of hospital closures, but they do not provide long-term solutions. Only successful turnarounds guarantee that hospitals remain crucial patient and community resources for years to come. We have previously shown that for successful turnarounds, four components are pivotal in the following order: (1) support, (2) timing, (3) leadership, and (4) strategy [16].

6. How Private Insurance Companies Can Help Prevent Hospital Closures

If hospital bankruptcies and closures are bad news primarily for patients and communities, the question is: can insurance companies help to avoid hospital closures or assist in turning around (f)ailing hospitals? The short answer is yes, they can, but their overall contribution to solving this problem is little.

Our complex health system has no alarm system in place that alerts the public in a timely fashion about impending hospital bankruptcies or closures [17], despite the fact that 53% to 68% of the nation’s hospitals ended 2022 with their operations in the red, according to the AHA [3]. As insurance companies can only react to hospital closures after the fact, their initial role is that of passive bystanders rather than actors that employ timely and proactive countermeasures such as network and provider expansion.

However, commercial insurance companies can help struggling hospitals before imminent closure, specifically in rural areas, through several mechanisms. First, adequate und timely payments by insurance companies would ensure ongoing operationality and improve financial stability. Second, by improving their payment systems, insurance companies that use a patient-centered payment system could ensure that hospitals are paid fairly for the services they provide. Third, standby capacity payments would support the minimum fixed costs of essential services, and service-based fees would only need to cover variable costs. It has been suggested that, under this model, service-based fees would be considerably lower than current fee-for-service payments. “Differing greatly from the current fee-for-service system, this approach would allow hospitals with lower patient volumes to shift their focus from increasing volume to increasing the quality and value of services performed.” [17]. Fourth, reduced service-based fees could make care more affordable for individuals in the community.

Such investments by insurance companies are strategic decisions that may help to prevent closures of struggling (rural) hospitals. In the long term, they may be less costly to the health insurance industry than the many above-mentioned negative consequences that are associated with hospital closures. Importantly, struggling hospitals must do their part as well to prevent closure by focusing on the development of strategies that increase efficiency and quality to demonstrate their improved competitiveness to insurance companies.

7. How Medicare and Medicaid Can Help Prevent Hospital Closures

In addition, more balanced federal and state health policies such as higher Medicare and Medicaid reimbursement rates for rural hospitals can positively impact their financial stability since rural hospitals have a higher reliance on public payers. Specifically on the state level, policymakers can allocate more funds to facilities and providers. Such changes in health policy have the potential to reduce the risk of hospital closures especially in rural communities.

8. Summary: The Author’s Point of View

In summary, the role of and the consequences to insurance companies concerning hospital closures are a mixed bag in that they are both the cause and the solution. Although insurance companies can contribute specifically to rural hospital closures through low reimbursement rates, they can also help to prevent such closures through the opposite mechanism by providing higher reimbursement rates and other forms of financial support. It is in the best interest of the healthcare industry to help reduce the number of hospital closures to ward off higher costs for insurance companies and higher premiums for customers. Ultimately, these measures will help to improve the sustainability of the U.S. healthcare system.