Audio File: mp3Ten Talk: Episode 2

Rick Babson: Hi, and welcome to TEN Talk, a podcast by the Kansas City Fed. I’m Rick Babson, managing editor in our Public Affairs Department and your host for this episode. With me today is Kelly Edmiston, a senior economist in the bank’s Economic Research Department. Kelly, thanks for being with us today.

Kelly Edmiston: Thanks for having me.

Babson: Kelly, you recently published in our Economic Bulletin series research that looks at the closure of hospitals in rural areas and the effect on economic growth, or more importantly, the lack of growth in employment and wages in those areas. So, in a nutshell, why don’t you share with us what you found.

Edmiston: Well, the primary takeaway is about employment and wages. Specifically, I found that, on average, counties with hospital closures saw total employment decline by about half a percent annually in the three years following the hospital closure compared to employment growth of 0.7 percent in similar counties that did not have a hospital closure—so there was quite a difference. Moreover, aggregate wages in the counties that lost hospitals increased much more slowly than in similar counties that did not have hospital closures. I looked at growth in employment wages before the hospital closures also. By doing so, I was able to conclude that the result I found was not simply the continuation of an existing trend in these counties, rather the economic trajectories clearly changed in these counties after the hospitals closed. The economic consequences in smaller counties was much more pronounced than it was in larger counties.

Babson: That’s interesting, certainly, but was any of it really surprising to you?

Edmiston: In general, the results are not surprising. Hospitals often are among the largest employers in rural counties and there are multiplied effects. For example, when the hospital workers lose their jobs they likely spend less at local businesses. At the same time, I was a little surprised by the magnitude of the outcome—half a percent annual decline in employment compared to 0.7 percent annual increase in employment is quite substantial, especially when one considers that these annual changes add up over time to something much more significant.

Babson: I’m curious, and wonder why initially did you look at hospitals as opposed any other sectors, and why maybe specifically rural hospitals; and I think it might be also helpful to know how you defined rural as opposed to some other definitions of rural.

Edmiston: OK. Well, first of all, rural can mean many things. The federal government agencies alone use 24 different definitions of rural. So, clearly, rural can mean many different things. The definition one uses is going to depend on the purpose for which he or she is defining rural. What I wanted to do was to focus on rural counties that are more isolated geographically and I don’t really consider that choice of counties to reflect the specific definition of rural or a new definition of rural but rather the selection of a well-defined study area, and that study area is counties that do not have any towns with populations of 10,000 or more.

Babson: Alright. So thanks. That addresses rural but why hospitals?

Edmiston: Hospitals are often one of the largest employers in rural areas. They’re often referred to as anchor institutions in the communities and in that sense they can kind of be at the heart of communities or central to communities, and the consequences of closure of any large employer would be expected to be severe economically but hospitals easily make additional contributions to the community beyond being a large employer. For example, many hospitals have aggressive public health campaigns that can help make residents in the community healthier. This outcome is positive in and of itself but also has some economic benefits. Healthier employees typically are more productive employees and they’re less likely to be absent from work and so on. Further, the closure of rural hospitals seems to have accelerated in recent years, which piqued my interest. There’s some informative recent research that examines the reasons why these hospitals are closing but there was little research on the consequences of rural hospital closures, and I sought to help fill that gap.

Babson: OK. Thanks. As for the consequences of closures, why don’t you share with us what some of them are and about how long does it generally take for some of these consequences to show up.

Edmiston: Well, some of these effects are immediate. For example, the job losses from the hospital itself; and then the reduced local spending resulting from those job losses would likely be felt immediately as well. But there is some additional effects that may be quite significant, but would arise over a longer period of time. Examples would be the general level of health in the community and the extent to which a lack of access to a hospital may make a county less attractive as a place to live and work.

Babson: That’s understandable. In your research, you looked at counties and hospitals across the country, and from the map you use in the Economic Bulletin it’s apparent that the concentration of the closure of 74 hospitals you identified, mostly were in the Southeast and in Texas. Were there any factors in particular that made hospitals in those counties more vulnerable?

Edmiston: Well, I've seen some of the work on why rural hospitals have closed, of course, not only because it’s relevant to my work but also out of interest and concern. I think this is a continuing problem that even has potential to worsen. I didn't examine the why of hospital closures myself and therefore I’m a little reluctant to delve too deeply into that issue and it sounds simplistic, but in the end we have to remember that hospitals close because they’re not financially viable.

Babson: Yes, it could be simplistic and it does, at least at first glance, sound somewhat self-evident. So what specifically do we mean when we talk about financial viability?

Edmiston: So, my reading on the situation suggests that most of the reduction in the financial viability of these hospitals has come from the revenue end. And what that means is that many rural hospitals have seen a decline in patient volume and the patient mix has also changed. Rural hospitals typically see a larger share of patients on Medicaid or Medicare, and indigent patients as well. Typically, the compensation associated with Medicaid and Medicare would be less than it would be with a privately insured patient. The role of federal financing in all this is very complex but likely explains at least part of the variation in closures in different parts of the country as well. For example, Medicaid is largely a state responsibility even though much of it is federally financed and reimbursement rates themselves for things like Medicare and Medicaid can also vary across states, but there are many factors that explain variations and rural hospital closure rates in different parts of the country, only some of which can be explained by these financing mechanisms.

Babson: Alright. So, other than Medicaid and Medicare that you mentioned, and reimbursement, were there other factors that contributed to these hospitals closing?

Edmiston: Multiple factors are at play. One interesting phenomenon that I think most people have not considered, and this is just one factor, is the role of insurance deductibles. Many people have insurance plans with relatively high deductibles, so they have to pay for a significant amount of their health-care costs out of pocket before their insurance kicks in. In some cases, a patient will initially get treatment at the local rural hospital and initially they’re likely to be subject to that deductible, and if the patient can’t pay, the rural hospital will likely be uncompensated for the care they provided. There are limits to the types of care that can be provided by small, rural hospitals, so some patients are eventually transferred to larger, usually urban, hospitals, but by the time they have been transferred they often have met that deductible or surpassed their deductible so insurance covers most of the care received at the larger urban hospital to where they were transferred and in such a case as this then the larger hospital receives compensation from insurance for providing care to a patient while the smaller rural hospital does not.

Babson: That certainly sound like a bad deal for the rural hospital, doesn’t it. So, getting back to the concentration of closures in the Southeast and Texas. You’ve also identified some closures in our Tenth District.

Edmiston: I did, yes. There were five in Oklahoma, three Missouri, two in Kansas, one in Nebraska and there was also one in Colorado that closed but it reopened about three years later. These are the hospitals in my study area. There have actually another hospital closures in the District in places that many people, including myself, might consider to be rural.

Babson: Were there any differences among the hospitals that closed in our District and the rest of the ones that you studied? Is there any kind of insulating factor perhaps that might protect rural hospitals in our District?

Edmiston: I don't know that there’s anything specific about our District that would lead to either more or less hospital closures than in other parts of the country. To the extent that Medicaid expansion plays a role, and to be clear that’s not something I’ve studied myself, Colorado and Nebraska are the only District states that have expanded Medicaid and Nebraska did so in 2019. I might note that Morgan Stanley released a study of hospital finances in 2018, and to be clear this included urban hospitals as well, but they found both Kansas and Oklahoma to be among the six states in their high-risk pool. I haven’t seen the study closely myself and I can’t comment on its quality, but the results of that are sobering.

Babson: Yes, that’s interesting. Of course you know that the high-risk pool is not one that anybody really wants to swim in. Overall, is there anything from your research that points you in a direction about the future of hospitals in rural areas? Are there more hospitals out there that are closing that haven’t yet?

Edmiston: Well, recent research reports by a number of different organizations suggests that many more rural hospitals are at risk of closing if their finances do not soon improve. I don’t think we’ve seen the end of this problem and I think it has potential to worsen even. I’m sure there are many smart, knowledgeable people out there who are working hard to make sure that this doesn't happen and hopefully they’ll be able come up with some solutions to mitigate this problem going forward.

Babson: Well, we can certainly hope so. Thank you, Kelly, for your time and your insight today on the impact of closing hospitals in rural areas and thanks to our listeners for tuning in to our TEN Talk podcast. The views expressed today are those of the host and guest and don’t necessarily reflect the Kansas City Fed or the Federal Reserve System. For more of Kelly’s research and our podcasts, please visit External