Hospitals With More Medicare Patients Are More Likely to Close or Be Acquired

Hospitals with a higher share of Medicare patients were more likely to face closure or acquisition and had more rapidly declining profits, according to a study published in Health Affairs.

The COVID-19 pandemic has led to significant financial difficulties for the Medicare and Medicaid programs, and the authors predict there will be pressure to curb the growth in fees paid by public payers.

The study analyzes the “relationship between public payment and the hospital industry market structure” by evaluating whether a hospital’s Medicare share is associated with the hospital’s profitability and likelihood it could close or be acquired.

“We hypothesized that hospitals with higher Medicare shares would experience greater declines in profitability and a higher likelihood of closure or acquisition relative to hospitals with lower Medicare shares,” the authors wrote. “We further hypothesized that the relationship between Medicare share and profitability would grow over time…”

They used hospital cost reports from Medicare’s Healthcare Cost Report Information System, as well as data from the American Hospital Directory, Dartmouth Atlas of Health Care Hospital Tracking Files, Medicare’s Provider of Services files, CMS Impact files and the Census Bureau. The study analyzed nonfederal short-term general acute care hospitals, excluding those designated as critical access, those in U.S. territories, those with negative revenue or expenses and those with missing explanatory variables.

There were 2 analyses:

• The closure-and-acquisition analysis included 2,986 unique hospital observations from 2010 to 2016.
• The profitability analysis included 3,474 unique hospital observations, because some hospitals opened during the study period.

During the study period, 4% of hospitals closed and 19% were acquired. The majority of hospitals that closed or were acquired were in urban areas. Medicare shares were stable over time, but payment rates were rising more slowly than the hospital market basket.

“Hospitals with higher Medicare share were more likely to be rural, nonteaching, and public hospitals with a healthier Medicare case-mix and lower Medicaid share,” the authors wrote. “They were also more likely to have fewer beds and lower wage indices and to be in counties with smaller, older, and slower-growing populations.”

Hospitals with a Medicare share of more than 65% had negative operating margins that were substantially lower than those of hospitals with a Medicare share of less than 35%. Hospitals with a higher Medicare share had a 22% probability of being acquired and a 1% probability of closing by 2016. In comparison, hospitals with a lower Medicare share only faced a 16% and 0.15% probability of being acquired and of closing, respectively.

“These results also do not suggest that public payers should refrain from reducing fees out of fear of inducing hospital closure or acquisition,” the authors wrote. “Payment rates should be set to preserve access and quality, but that does not mean that all hospitals must remain open.”