Why Pursuing M&A Could Be a Must for Many Rural Hospitals

A new report reveals the benefits of integrating with larger health systems for struggling rural facilities.

One tried-and-tested approach to keeping rural hospitals open and preserving access to care in those communities is integration with health systems.

While it may not be right choice for all rural hospitals, facilities that are vulnerable can greatly improve their financial viability and sustainability by affiliating with, merging with, or being acquired by a larger hospital operator, according to a new report.

The analysis, which was conducted by consulting firm Dobson DaVanzo & Associates and commissioned by the Coalition to Strengthen America's Healthcare, examined research on the economic state of rural hospitals, Medicare cost reports, AHA Annual Survey data, and interviews with stakeholders.

Many rural hospitals have succumbed to financial pressures, the report found, with 110 closures occurring between 2011 and 2021. More than half (55%) of those closures were of standalone hospitals.

Meanwhile, 45% of the hospitals that were at high risk before a merger, acquisition, or affiliation with a larger system between the same period experienced financial improvement after integrating. The average total margins of rural hospitals post-merger jumped from 1.8% to 2.2%, and for facilities post-affiliation that figure climbed from 1.5% to 2.3%.

One in three hospitals that were at high risk of closure were no longer high-risk after merger or being acquired, whereas two in three hospitals that were at high risk of closure were no longer high-risk following affiliation, the report stated.

Aside from the financial benefits, integration can also serve rural hospitals operationally.

"Additionally, rural hospitals that align themselves with a hospital system can benefit from the management processes, organizational structures, telehealth capabilities, and technological innovation available at other system hospitals," the report said.

The importance of M&A for rural hospitals right now can't be overstated, with more closures likely on the way. According to recent analysis by the Center for Healthcare Quality and Payment Reform, more than 700 facilities, or 30% of all rural hospitals in the U.S., are facing closure, including 360 being at immediate risk.

Low reimbursement from payers is the number one factor creating financial turbulence for these hospitals, putting stress on CEOs to find solutions for keeping their doors open.