When an independently owned rural hospital is in financial crisis, hospital leaders often say they’d be able to survive if only a big hospital system would come in and buy them. It would give them an infusion of capital, help with technological upgrades, and increase their patient population and ability to negotiate better reimbursement rates with insurers.
And sometimes when a rural hospital is already owned by a larger system and begins to struggle, its hospital administrators will point to the facility’s affiliation as its safety net. They’ll say that while their hospital’s specific numbers might look bad, what we can’t see are all of the resources it has access to through this larger system — resources that will ensure its survival.
But new research recently published in the Journal of the American Medical Association, or JAMA, says affiliations with big systems might not always be as positive as hospital executives make them out to be.
“Overall, affiliation was not associated with greater or lower risk of closure compared with being independent,” the authors wrote.
And that could have implications in a state like North Carolina where many rural hospitals have sought fiscal shelter in a larger system.
“For every narrative of ‘the system came in and saved us and kept this hospital open,’ there’s another one that the system came in and started stripping out all the profitable stuff and left us a shell and shut us down,” said Mark Holmes, a rural hospital researcher at the UNC Sheps Center. “The study is very useful in offering both sides of that narrative.”
A Counterintuitive Finding
In North Carolina, very few hospitals are independent, according to the North Carolina Healthcare Association. Of the 113 acute care hospitals in the state, just 10 are considered independent — a term nearly everyone defines slightly differently. For the NCHA, it means not affiliated with or managed by another system.
Seven of those 10 independent hospitals are in rural counties. Overall, that means about 13 percent of North Carolina’s 54 rural hospitals remain independent, while about 87 percent have now affiliated with a larger system.
Since 2005, 11 North Carolina rural hospitals have closed or been converted to some other type of facility.
So, is it true that affiliation with a larger hospital system decreases the risk of closure for rural hospitals? Are North Carolina’s affiliated rural hospitals safer than their independent counterparts?
The researchers found that for rural independent hospitals that were struggling financially in 2007 (the start of their analysis) and then acquired, affiliation with a larger system decreased their risk of closure by about 50 percent on average.
Surprisingly though, for rural hospitals that were financially stable in 2007 and then acquired by a larger system, their risk of closure actually increased two-fold.
“This finding is indeed somewhat puzzling,” said Joanna Jiang, one of the study’s co-authors. It suggests the need for further investigation, she said, perhaps an “in-depth qualitative study on a case-by-case basis to uncover any idiosyncratic issues affecting decision-making at the system level.”
Holmes said this could simply be a weird coincidence, or it could be that even though the second group of hospitals were stable in 2007, perhaps they started to struggle financially a few years after.
“The system newly acquires this hospital that used to be okay, but let’s say they started struggling in 2010,” Holmes said. “The system is no longer able to keep them up, and so they end up closing.”
Merger’s Effects on Community Are Complicated
Rural hospitals become affiliated with larger systems for all sorts of reasons. A 2020 study from researchers at the Sheps Center found that rural hospitals that merged with larger systems were more likely to be structured as for-profits but not bringing in much money. They were also larger and less able to cover their debt — in other words, struggling financially. Their buildings were older, and they’d stopped providing obstetric care, which can be a significant cost for any hospital.
Once a merger happens, the effects on a rural community are multifaceted. Another study in JAMA (conducted by some of the same authors as the affiliation study) found that for rural communities, mergers can improve the quality of care.
They found that the risk of death following a handful of different procedures decreased over their study time frame among both affiliated and independent rural hospitals. However, the decrease was more significant at the affiliated hospitals, perhaps because of better access to resources and updated technology.
But in another study, those same authors found that rural hospitals which underwent mergers were more likely to eliminate obstetric and surgical services than hospitals that remained independent. They also found that independent hospitals increased their substance use disorder and mental health care services, while those services at affiliated hospitals either decreased or stayed the same.
“Mergers may provide funds, resources, and strategic direction for hospitals to realign their services to achieve financial solvency,” the study authors wrote, “But reduction of service lines within the acquiring hospital or health system might not be consistent with the health needs of the community.”
The Financial Model Matters
Whether a hospital is for-profit or non-profit can also play into this dynamic. The original JAMA study found that rural hospitals affiliated with a for-profit system were four times more likely to close than those affiliated with a non-profit system.
While that particular finding is new, the feeling that for-profit systems might pose a greater threat to rural hospitals than non-profit systems has been bubbling in western North Carolina since health care giant HCA acquired non-profit Mission Health in 2019.
Part of that deal includes a requirement that HCA cannot close any facilities for a decade, but many community members in the Appalachian region of the state fear what the landscape might look like once the provision expires.
“With the COVID pandemic and the coming recession, we have a lot of reasons to worry about the survival of rural hospitals,” Jiang said. “System affiliation can bring certain advantages to rural hospitals that struggle with low volumes, workforce shortage, and lack of access to financial resources.”
But, she said, that strategy shouldn’t be treated as a “panacea.”
“The entire health care sector has been moving toward consolation at all levels and in both vertical and horizontal directions over the last 10 years as a result of policy intervention. This creates a dilemma of how to balance the need for local and individual decision-making,” she said.
“Is system affiliation the most appropriate form of inter-organizational arrangement? Or should we also explore other types of arrangement?”