Typically when a business closes, it is a sad event, but one business’s demise often makes way for more efficient competitors to gain market share. This is rarely, how hospital closures are seen, however. In the press, a hospital closure is met with fears of decreased health care access and quality for the local community.
There is some merit to these fears because, unlike a typical business closing, the hospital market is not your typical free market. First, Medicare and Medicaid fix prices for their patients. Often, Medicaid payments will cover a hospital’s variable, but may not be sufficient to cover the average cost of care if the hospital treats too many Medicaid patients. Secondly, there are problems of moral hazard for insured individuals. Finally, many non-profit hospitals are not run in a profit maximizing fashion. Non-profit hospitals are often overseen by a community board whose goal is not profit maximization.
To evaluate how hospital closures affect social welfare, a paper by Capps, Dranove and Lindrooth (2010) examines the closures of hospitals in three urban markets (Phoenix, Tampa, and Tuscon). The authors found that the hospitals closures increased aggregate welfare.
“the cost savings from the closures we studied more than offset the reduction in patient welfare. However, we also found that because some of the cost savings are shared nationally, several of the closures led to a decline in total surplus in the local community.”
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