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Three Financial Indicators to Predict Rural Hospital Closures

Hospital closures can be detrimental to rural communities with limited access to healthcare. Since 2005, 181 rural hospitals across the United States have permanently closed. In looking for trends, The North Carolina Rural Health Research Program and the Cecil G. Sheps Center for Health Services Research reviewed data from hospital closures during a portion of those years (2017-2020) to determine if any shared common links. They looked at a total of 56 hospital closures for comparison.

The research resulted in three main commonalities:

1. Geography

Hospital closures during this time were primarily geographically situated in the Southeast and Southcentral regions of the United States.

 Of the total 56 hospital closures reviewed, 39 were located in 12 states (listed alphabetically): Alabama, Arkansas, Florida, Georgia, Kansas, Louisiana, Missouri, North Carolina, Oklahoma, South Carolina, Tennessee, and Texas.

2. Margins and Cash on Hand

In the year prior to closure, most of these rural hospitals had a negative operating margin, negative total margin, and few days of cash on hand.

Negative Margins

Fifty of the 56 hospitals reviewed had a negative total margin prior to closure. Those that did have positive operating margins were likely to have negative total margins and low days of cash on hand.

Cash on Hand

Forty-seven of the 56 hospitals reviewed had less than one-month days cash on hand. The hospitals with a relatively high number of days cash on hand were associated with larger health systems that typically have larger cash reserves. The hospitals that did have large days cash on hand all had negative operating and total margins.

3. Profitability and Liquidity

Compared to rural hospitals that remained open during this reporting time, most of the rural facilities that closed were much more unprofitable and much less liquid than their counterparts.

The research demonstrates the importance of profitability and liquidity to predict financial distress and closure of rural hospitals.  COVID-19 has unfortunately exposed long-term unprofitability among some rural hospitals and relatively low-level days of cash on hand. While some have experienced a reprieve due to funds from the CARES Act, many rural hospitals continue to struggle financially as a result of the pandemic, reduced income due to fewer elective surgeries, etc.

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