Differences in Rural and Urban Hospital Cost Structures: Evidence and Implications

Research center:
Lead researcher:
Project funded:
September 2021
Anticipated completion date:
August 2022

The purpose of this research is to compare fixed-to-variable cost ratios in U.S. hospitals and then describe the policy implications of differences in rural/urban hospital cost ratios and of variation across types of rural hospitals. It is hypothesized that smaller hospitals (with size to be defined in terms of net patient revenue and/or other variables) will have less opportunity to benefit from economies of scale. This will reduce the opportunity for rural hospital financial success and could potentially have important policy implications for rural hospital leaders and hospital payment policy designers.

Understanding fixed-to-variable-cost ratios is critical to understanding the financial consequences of hospital service line changes and health care payment policy changes. In fee-for-service payment systems, increasing service volumes (often difficult in a service area with a declining population) is key to maintaining or increasing profitability. For hospitals with relatively high fixed costs (typical of small hospitals), increasing volume becomes even more imperative because those costs can be spread across more units. When a value-based payment system is introduced (such as a global budget), and service volume reduction is desired (such as reducing excessive Emergency Department visits or inpatient readmissions), hospitals with high fixed costs will realize relatively less cost reduction (and thus less profit) when reducing service volumes.