U.S. hospitals shut at 30-a-year pace, with no end in sight

The pace of hospital closures, particularly in hard-to-reach rural areas, seems poised to accelerate, and technology may be exacerbating the trend.

Hospitals have been closing at a rate of about 30 a year, according to the American Hospital Association, and patients living far from major cities may be left with even fewer hospital choices as insurers push them toward online providers like Teladoc and clinics.

Morgan Stanley analysts led by Vikram Malhotra looked at data from roughly 6,000 U.S. private and public hospitals and concluded 8 percent are at risk of closing; another 10 percent are considered “weak." The firm defined weak hospitals based on criteria for margins for earnings before interest and other items, occupancy and revenue. The “at risk” group was defined by capital expenditures and efficiency, among others.

The next year to 18 months should see an increase in shut downs, Malhotra says.

The risks are coming following years of mergers and acquisitions. The most recent deal saw Apollo Global Management swallowing rural hospital chain LifePoint Health for $5.6 billion last month. Apollo declined to comment on the deal; LifePoint has until August 22 to solicit other offers. Consolidation among other healthcare players, such as CVS’s planned takeover of insurer Aetna Inc., could also pressure hospitals as payers push patients toward outpatient services.

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An exam bed sits in a room at Perry Memorial Hospital in Princeton, Illinois, U.S., on Wednesday, Oct. 11, 2017. Photographer: Daniel Acker/Bloomberg

There are already a lot of hospitals with high negative margins, consultancy Veda Partners healthcare policy analyst Spencer Perlman says, and that’s going to become unsustainable. Rural hospitals with a smaller footprint may have less room to negotiate rates with managed care companies and are often hobbled by more older and poorer patients.

Also wearing away at margins are technological improvements that enable patients to get more surgeries and imaging done outside of the hospital. They are also likely to be forced to pay more to attract and retain doctors in key areas, Bloomberg Intelligence analyst Jason McGorman says.

They “are getting eaten alive from these market trends,” Perlman cautions.

Future M&A options could be too late—buyers may hesitate as debt-laden operators such as Community Health Systems and Tenet Healthcare focus on selling underperforming sites to reduce leverage, Morgan Stanley’s Zachary Sopcak contends.

But some hospitals are rising to the occasion, Perlman notes. Some acute care facilities are restructuring as outpatient emergency clinics with freestanding emergency departments. “Microhospitals,” or facilities with 10 beds or fewer, are another trend that may hold promise.