Impeding Access or Promoting Efficiency? Effects of Rural Hospital Closure on the Cost and Quality of Care

This paper studies the effect of hospital closure on the cost and quality of health care in rural markets. Hospital closure can be welfare improving if it reallocates patients to more efficient facilities but can also lead to treatment delay and worsened health outcomes. I find support for both sides of this debate. Using a difference-in-differences analysis of Medicare claims, I compare enrollees who lost their closest hospital as a result of closure to enrollees who lost their second closest hospital, as a result of the same closure. I show that hospital closure led to lower Medicare spending among enrollees who lost their closest facility, driven entirely by a reduction in inpatient admissions after the closure. Examining outcomes, I find that hospital closure led to increased mortality among enrollees with time-sensitive health conditions. I study implications of forestalling closure in the context of the Critical Access Hospital (CAH) program, which allows certain rural hospitals to receive cost-based reimbursement from Medicare, rather than prospective payments. About half of all rural hospitals are CAHs and program payments amount to approximately $1 billion per year. Using the CAH program as an instrument for hospital closure, I find that the move to cost-based reimbursement led to a reduction in hospital closures and an improvement in mortality, but the program's expenditures were substantial relative to these effects.