The Financial Crisis of Rural Hospitals, Explained


Declining revenues and razor-thin operating margins threaten to shutter rural hospitals.


Mike Newman
Regional Managing Director
Public Finance
Chris Janning
Managing Director
Public Finance


Until recently, hospitals’ primary concern was whether rapid spikes in the infection curve would overwhelm their bed capacity and supplies. Their anxiety was called for—hospitals in pandemic epicenters like New York City, Seattle, Chicago, Detroit, Los Angeles, and New Orleans struggled with ICU capacity limitations early on.

In response, federal and state officials suspended elective surgeries and ordered hospitals to reserve a percentage of their capacity to ensure they could treat patients infected with COVID-19.

Yet, while many researchers predict the ongoing rate of infection will overwhelm the available ICU beds in rural hospitals, to date many of them have seen a comparatively small number of coronavirus cases.

As a result, these preventive measures have left rural hospitals—many of which were financially challenged prior to the pandemic—in severe financial distress. If additional state and federal aid is not forthcoming, some are facing the specter of bankruptcy or outright closure.

Financial Strains
The decision to restrict elective surgeries and other health care services has severely affected the revenues of all hospitals, including rural hospitals. Additionally, volatile market conditions made it virtually impossible for many hospitals to liquidate assets at anything other than a loss to cover missed revenue and operating costs.

Significantly, most small, rural hospitals had much lower levels of reserves compared to larger suburban and urban providers. The cost of maintaining staffing during the pandemic without the ability to provide their normal revenue producing services is rapidly depleting those modest reserves.

A recent Dallas Morning News article illustrated the revenue troubles many hospitals are experiencing. The chart below shows the average decline in key revenue-generating services compared to January norms at more than 1,000 U.S. hospitals:


Service Percent Decline
In-patient admissions -30%
Emergency room visits -40%
Observation services -47%
Outpatient ancillary services -62%
Outpatient surgery volume -71%
Source: Crowe RCA Benchmarking Analysis, May 2020, and Dallas Morning News, based on financial transaction information and account-level data.


While larger health systems have the cash reserves to continue operating, community-based hospitals in rural areas throughout the country that were already in a precarious financial position felt the crunch immediately.

Aside from the decline in services, much of the strain for rural hospitals comes from the inability of uninsured or underinsured patients to pay for care. Rural hospitals in states who have expanded Medicaid are faring better, especially given the advanced reimbursements coming their way.

However, in the 14 states who have not adopted the expansion, like Texas and Oklahoma, rural hospitals are left providing uncompensated care, leaving approximately 38 percent of them unprofitable.

According to a study by the Chartis Center for Rural Health, hospitals in these states often have a lower median operating margin and a greater percentage of them are operating with a negative operating margin. Furthermore, rural hospitals commonly experienced steady declines in operating margin and revenue in the three years before closure. And in a hospital’s last year, those metrics accelerated sharply.

The lack of cash and uncompensated care become especially acute when it’s time to pay staff. As a result, many hospitals have begun laying off or furloughing staff—a last ditch effort to avoid either bankruptcy or outright closure.

Twelve rural hospitals have closed their doors in 2020, and 130 have closed since 2010. To make matters worse, more than 450 rural hospitals are at risk of closing across the United States.

If this continues, more hospitals will close just as rural counties are seeing increases in confirmed COVID-19 cases. These closures will leave citizens in need of care without a nearby provider, as well as exacerbate the economic fallout as rural hospitals are often among the largest employers in their regions.

Federal Economic Relief Efforts to Date
The federal government has acknowledged the financial hardship of hospitals and health care systems wrought by COVID-19 and pandemic-containment measures. Since March, Congress has earmarked funds or altered existing Medicaid and Medicare rules in every phase of relief legislation to help health care providers, including:

  • $8.3 billion in emergency aid, including:
    • $6.5 billion for the Department of Health and Human Services to help hospitals with medications, supplies, and increasing surge capacity
    • Of that amount, $2.2 billion is designated specifically for the Centers for Disease Control and Prevention, $3.1 billion is for the Public Health and Social Services Emergency Fund, and $836 million is for the National Institutes of Health
  • $130 billion in relief funds through the CARES Act, including:
    • $100 billion to reimburse hospitals for COVID-19 related expenses and lost revenue
    • $16 billion to help with hospital supply shortages
    • $11 billion to help develop vaccines, medicines, etc. related to COVID-19
    • $200 million for health care providers offering telehealth
    • $250 million to increase bed capacity
  • A 6.2 percent increase in Medicaid matching funds to counteract provider reimbursement cuts
  • An accelerated/advance Medicare reimbursement payment program administered by the Center for Medicare and Medicaid Services (CMS)
  • A temporary suspension of the Medicare sequestration
  • A 20 percent increase in COVID-19 related Medicare reimbursements

Most recently, Congress passed an additional $484 billion relief bill on April 23, 2020. The bulk of the funds went to restarting the PPP loan program for small businesses; however, Congress allocated $75 billion in emergency relief to hospitals.

Federal Relief, Although Problematic, Offers a Brief Respite

While every phase of relief legislation helps, certain stipulations either exclude rural hospitals or offer only short-term assistance. For example, the CMS’ Accelerated and Advance Payment Program provides hospitals with up to six months of advanced Medicare reimbursements, but those are netted out of future reimbursements, offering near-term liquidity at the penalty of future revenues.

Furthermore, while the Act increases Medicare reimbursements for coronavirus-related treatments by 20 percent, it only applies to hospitals who are paid under the Inpatient Prospective Payment System, which doesn’t include the 70 percent of rural hospitals that are critical access hospitals.

Lastly, the CARES Act relief funds allocated to helping small business pay staff and avoid layoffs or furloughs exclude governmental entities—and counties, cities, and hospital districts own a large majority of rural hospitals.

Despite these gaps, rural hospitals are seeing some reprieve. In April, the Department of Health and Human Services (HHS) began distributing $50 billion of its Provider Relief Fund to hospitals and medical practices. HHS distributed $30 billion from April 10-17, and began distributing the remaining $20 billion on April 24.

The fund includes a targeted allocation of $10 billion for rural hospitals. In Texas, that equates to approximately $350,000 per hospital, which covers about two weeks of payroll on average. Hospitals do not have to repay these awards so long as they use them on COVID-19 testing, treatment, or to cover impacted revenues.

However, members of Congress, state-level HHS officials, and the former CMS administrator are concerned that the way the Provider Relief Fund was distributed favors larger hospitals and health systems over providers who serve communities with a greater proportion of uninsured and vulnerable patients.

A Stunted Reopening

Short-term cash infusions may help rural hospitals get over the hump and retain staff for the next several months, but they’ll need to start recouping lost revenue sooner rather than later. While it’s likely they’ll see slight bumps in revenue as COVID-19 infections start to rise in rural counties, the same problem of uninsured or underinsured patients will continue to crop up.

Many states have started a phased reopening, allowing businesses to open their doors and lifting restrictions on elective surgeries. This is a step in the right direction as far as rebooting the economy and helping hospitals generate revenue. However, patients have been hesitant to schedule nonessential appointments and surgeries.

In fact, patients are so concerned about contracting COVID-19 in a medical setting that they’ve delayed seeking essential medical care for heart attacks, strokes, and other life-threatening injuries.

The Way Forward for Rural Hospitals

This type of consumer behavior is only prolonging the financial crisis at a time when hospitals need to start recovering lost revenue. According to a study By Crowe LLP, in order to recover, hospitals will have to run at 110 percent capacity for six months (the average total occupancy rate for rural hospitals in 2016 was 52.2 percent); carefully prioritize critical or high-efficiency surgeries; address staffing shortages as a result of furloughs; and navigate through altered revenue cycles caused by federal government relief efforts.

Until that time, they’ll have to overcome near-term financial distress, especially if federal government relief funds fall short. But they’re not without options. Some rural hospitals have begun to tap state programs for additional funds, borrow money against receivables, leverage CMS 1135 waivers, or issue secured notes to local banks.

However, these stopgap solutions aren’t one size fits all—they depend on a hospital’s individual situation and the means available to them in their state or region.

The pandemic will undoubtedly leave rural hospitals in financial distress long after a sense of normalcy returns. To continue operating and serving their communities, many will have to consider long-term arrangements like acquisitions, dispositions, strategic affiliations, limited joint ventures, management contracts, or long-term lease negotiations, to name a few.

A Financial Advocate
As one of the top five financial advisors on health care transactions in the nation,1 HilltopSecurities recognized the threat COVID-19 posed to rural hospitals early on. In response, we offered complementary financial advisory services related to addressing the financial consequences of the pandemic to community-based hospitals with 75 beds or less in Texas, Oklahoma, and New Mexico.

In a time of financial stress for the health care sector, our offer was the right thing to do—both because we have the resources and experience to do it, and because our role as an advocate for these hospitals called for nothing less.

If your hospital is struggling through the pandemic and meets the criteria above, please email us at or call 1-433-4HILLTOP to find out how we can help.

This communication is intended for issuers for educational and informational purposes only and does not constitute legal or investment advice, nor is it an offer or a solicitation of an offer to buy or sell any investment or other specific product or service. Financial transactions may be dependent upon many factors such as, but not limited to, interest rate trends, tax rates, supply, and change in laws, rules and regulations, as well as changes in credit quality and rating agency considerations. The effect of such changes in such assumptions may be material and could affect the projected results. Any outcome or result HilltopSecurities, or any of its employees, may have achieved on behalf of our clients in previous matters does not necessarily indicate similar results can be obtained in the future for current or potential clients. HilltopSecurities makes no claim the use of this communication will assure a successful outcome. This communication is intended for institutional use only. For additional information, comments or questions, please contact Hilltop Securities Inc.

Hilltop Securities Inc. (HTS) is a registered broker-dealer, registered investment adviser and municipal advisor firm that does not provide tax or legal advice. This document is intended for educational and informational purposes only and does not constitute legal or investment advice, nor is it an offer or a solicitation of an offer to buy or sell any investment or other specific product or service. HTS is not recommending an action to you as the municipal entity or obligated person. HTS is a wholly owned subsidiary of Hilltop Holdings, Inc. (NYSE: HTH) located at 1201 Elm Street, Suite 3500, Dallas, Texas 75270. Member: NYSE/FINRA/SIPC.

1 Based on number of health care-oriented bond and note transactions as municipal advisor between April 30, 2015, and April 30, 2020. Ipreo MuniAnalytics.

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