The Economic Impact of Hospitals in Rural Communities
Authors: McDermott Richard E. , Cornia Gary C. , Parsons Robert J. 
Published: April 2008

ABSTRACT: This article presents how to assess the economic impact of a hospital on a rural community. The economic impact is identified by assessing the direct, induced, and indirect impacts that result because of the presence of a hospital in a rural community. The methodology utilizes survey data and estimation procedures for four rural hospitals. The economic impact estimates are based on microdata. Income multipliers are estimated for each of the rural communities. The research demonstrates that rural hospitals do make significant economic contributions to the communities they serve. Community leaders can use the model presented to evaluate the economic impact of their local hospital.

The economics of rural health care have changed dramatically during the 1980s. It is estimated by a staff report to the United States Senate Special Committee on Aging that as many as 600 rural hospitals face the prospect of closure in the next few years (U.S. Congress, 1988).

In evaluating the possible closure of a rural hospital, community leaders should consider the impact this closure will have on the health of the residents who live in communities served. Issues to be reviewed include the continued accessibility of residents to emergency, outpatient, and preventive health care services, and the distance that residents will have to travel to access inpatient health care.

In addition, community leaders should also evaluate the impact that a hospital's closure will have on the economy of the local community. This is relevant because one of the alternatives to closing a facility that cannot generate revenues sufficient to cover opera ting expenses is to subsidize the facility, either through private contributions or a tax levy.

Christenson and Faulkner, (1981) using aggregate secondary data, concluded that rural hospitals contributed an average of $700,000 to $1 million to local rural economies. With a mean size of 43.8 beds per hospital surveyed, this amounts to $15,982 to $22,831 per bed. Doeksen, Loewen, and Strawn, (1990) using data drawn from Stigler, OK, concluded that the impact on income per patient bed would range from $14,662 in the first year of closure (1988) to $38,729 in the fifth year of closure. When retail sales and tax collections are included, these figures jumped to $18,549 and $48,977 respectively. Our study, using microdata collected from four hospitals, indicates induced and direct impacts per bed ranging from $40,103 per bed to $99,933 per bed, for an average of $54,739 per bed.

How could this data be used in making a decision to close or subsidize a rural hospital? One approach would be to compare the amount of the subsidy needed to keep the hospital open with the amount of the income that would be lost by the community, should the hospital be closed.

For example, assume a 70‐bed hospital has an average length of stay of five days, an average occupancy of 50 percent, and an average cost per admission of $3,500. Total yearly costs for the facility would be $8,942,500. Assume that the facility has a yearly operating loss of 5 percent of total costs. The community would need to subsidize the facility $447,125 per year to keep it open. Assume that those making the decision to subsidize or close the hospital used the methodology outlined in this article to calculate that the income loss to the community for closing the hospital would be $54,000 per bed. For a 70‐bed facility, this would amount to an income loss of $3,780,000 per year. From a purely economic standpoint, it would make sense to subsidize the hospital.

This paper has shown that rural hospitals do make significant economic contributions to the communities they serve, and has demonstrated a model that community leaders can use to evaluate the impact of a local hospital closure.