Hospitals are closing across the United States because the cost of running them is rising faster than the payments they receive for patient care. Between 2005 and 2023, 146 rural hospitals alone either shut down completely or stopped providing inpatient services, and the pace picked up again after 2022. The financial math has become unsustainable for many facilities: razor-thin margins, workforce shortages, inadequate government reimbursement, and a fundamental shift in where patients receive care are all converging at once.
The Financial Margins Are Vanishingly Thin
Most hospitals operate on margins so slim that even a minor cost increase can push them into the red. At the end of 2024, the median health system operating margin sat at just 1.3%, meaning that for every $100 a hospital brought in, it kept $1.30 after expenses. Four months of modest improvement were wiped out in a single month, underscoring how fragile these finances are.
The cost side of the equation is moving in the wrong direction across virtually every category. Supply expenses jumped 12.3% year over year in December 2024. Drug costs rose 6.1%, with an 11.1% spike in a single month, driven partly by expensive new therapies like GLP-1 medications and gene therapies. Technology and facility costs are climbing as well. Hospitals that can’t absorb these increases, particularly smaller and independent ones, face a straightforward choice: cut services or close.
Labor Costs Consume 60% of Every Dollar
Staffing is the single largest expense hospitals face, consuming roughly 60 cents of every dollar they spend. Between 2021 and 2023, hospital labor costs increased by more than $42.5 billion, reaching a total of $839 billion nationally. Wage growth in healthcare has outpaced economy-wide inflation for over a decade, and the gap keeps widening.
The workforce shortage makes this worse. Resignations among healthcare workers grew 50% between 2020 and 2023, forcing hospitals to rely heavily on contract and travel staff to keep their doors open. Hospitals spent approximately $51.1 billion on contracted workers in 2023. While that figure has come down from pandemic peaks, it remains far above historical norms. To compete for permanent staff, hospitals have had to raise advertised wages by more than 10% in a single year. For facilities already operating at a loss, these costs are simply not recoverable.
Government Insurance Pays Less Than Care Costs
A major share of hospital patients are covered by Medicare or Medicaid, and neither program pays hospitals enough to cover the actual cost of treatment. The Medicaid shortfall alone was $27.5 billion in 2023. Excluding supplemental payments, Medicaid’s fee-for-service program paid less than 58 cents for every dollar hospitals spent caring for Medicaid patients. Managed Medicaid plans paid slightly better, at less than 65 cents on the dollar. Even with supplemental state payments designed to close the gap, Medicaid still doesn’t cover the full cost of care.
Hospitals that serve a high proportion of Medicaid and Medicare patients lose money on a large share of their cases. They depend on commercially insured patients, who tend to generate higher reimbursement, to offset those losses. When a community’s payer mix tilts too heavily toward government insurance, the cross-subsidy breaks down and the hospital becomes financially unviable. This is especially common in rural areas and low-income urban neighborhoods.
Rural Hospitals Are Hit Hardest
Of the 146 rural hospitals that closed or converted between 2005 and 2023, 81 shut down entirely. Rural facilities face all the same cost pressures as urban ones but with a critical disadvantage: smaller patient volumes and lower occupancy rates mean less revenue to absorb those costs. They are also more vulnerable to economic fluctuations in their communities, where a single employer closing can shift the local insurance landscape overnight.
The consequences for rural communities are immediate and measurable. When a rural hospital closes, emergency medical transport times increase by an average of 7.2 minutes in total activation time. That may sound modest, but research from Utah’s Bureau of Emergency Services found that a single additional minute of EMS response time increases mortality by 8% to 17%. For conditions like heart attacks, strokes, and severe trauma, those minutes are the difference between recovery and death.
Maternity care has been especially affected. More than half of rural hospitals no longer offer birthing services, creating vast “maternity care deserts” where pregnant patients must travel long distances for prenatal care and delivery. This increases the risk of complications, particularly for high-risk pregnancies where quick access to emergency obstetric care is essential.
Profitable Procedures Are Moving Out of Hospitals
Hospitals are also losing revenue to a structural shift in how healthcare is delivered. Many procedures that once required a hospital stay now happen in ambulatory surgical centers or outpatient offices. In 2005, hospital outpatient departments performed 59% of outpatient surgical cases. By 2020, that share had dropped to 40%, with freestanding surgical centers and office-based facilities absorbing the rest.
This shift makes sense for patients and insurers. A hysterectomy for endometrial cancer, for example, saw a 41% volume shift from inpatient to outpatient settings over just seven years, saving roughly $2,500 per procedure. Similar patterns have played out in vascular procedures, gastroenterology, and orthopedics. But for hospitals, these were often the profitable cases that subsidized money-losing emergency departments and intensive care units. As the profitable work migrates elsewhere, what remains is disproportionately the most expensive and least well-reimbursed care.
Private Equity Ownership and Financial Extraction
Some hospital closures trace directly to private equity firms that purchased facilities, extracted profits, and left them financially hollowed out. The most prominent recent example is Steward Health Care. In 2010, private equity firm Cerberus Capital Management bought a struggling Massachusetts hospital system and converted it to for-profit. In 2016, Steward sold its hospital buildings and land to a real estate investment trust for $1.25 billion, then leased them back at what many considered inflated rents.
Cerberus ultimately made $800 million in profit on its investment and exited in 2020. But the hospitals were left saddled with unsustainable lease payments. Over the following years, Steward cut costs and neglected bills to keep up with rent, leading to understaffed emergency rooms, cancelled surgeries, suspended trash service, and facilities infested with bats. By May 2024, Steward filed for bankruptcy.
The pattern is not unique to Steward. Private equity firms typically aim to at least double their investment within three to seven years, then sell. A 2023 study found that Medicare patients at private equity-owned hospitals experienced a 25% increase in hospital-acquired complications compared to patients at other hospitals. Research from Harvard’s school of public health suggests that the cost-cutting strategies these firms use, particularly reducing staff and other essential inputs, make care less safe.
Mergers Don’t Always Save the Hospital
Hospitals facing closure sometimes merge with larger health systems as a survival strategy. In theory, joining a bigger network provides financial stability, shared resources, and better negotiating power with insurers. In practice, the acquiring system sometimes consolidates or eliminates service lines to reduce duplication, which can mean the community loses access to specific types of care even though the building stays open.
Researchers have raised concerns that these mergers increase the market power of hospital networks, leading to higher prices for patients and insurers without a corresponding improvement in care. For rural communities, a merger might preserve some services while eliminating others, like maternity care or behavioral health, that the larger system considers unprofitable at that location.
A Federal Lifeline With Limits
The federal government created a new designation called the Rural Emergency Hospital in an attempt to prevent total closures. Eligible facilities, generally small rural hospitals with 50 or fewer beds, can convert to this model, which allows them to run a 24/7 emergency department and outpatient services without maintaining inpatient beds. In exchange, they receive enhanced Medicare reimbursement.
The tradeoff is significant. These converted facilities can no longer admit patients for overnight stays (except in a skilled nursing unit), so anyone needing hospitalization must be transferred to a larger facility. For communities where the nearest alternative hospital is an hour or more away, this means faster stabilization in emergencies but longer journeys for everything else. It’s a compromise designed to keep some level of care available in places where a full-service hospital is no longer financially possible.