Rural-Urban Healthcare Access Gap: It’s All About The Fixed Costs

Rural residents in the U.S. face much greater challenges in accessing healthcare than their urban counterparts. Hospital disclosures and clinician shortages often grab the headlines. The key issue in addressing the rural-urban health care access gap is, like almost all things in healthcare, a monetary one—how to cover the fixed costs of medical practices and facilities?

All business entities incur fixed costs, which remain constant regardless of output volume within a certain range. Examples include depreciation on buildings and equipment, rent, executive salaries, IT, and human resources. Since these costs are not traceable to a business’ output, they are often called overhead. In contrast, variable costs are directly traceable to output and change with output volume, such as output-based clinician labor and medical supplies.

When a business makes a sale, the difference between the sales revenue and the variable costs contributes to covering its fixed costs and, after all fixed costs are covered, boosting its profit. The higher the price or the greater the sales volume, the more likely a business gets its fixed costs covered and generates a profit.

Rural residents are dispersedly located. The demand for healthcare in a vast rural area can still be a small fraction of the demand in a tiny urban neighborhood. Therefore, to generate sufficient sales just to cover their fixed costs, rural practices and facilities need to serve a large geographic area, which means average longer travel time for rural residents.

In the 1990s, Congress intervened by creating a “Critical Access Hospital” designation for rural hospitals with 25 or fewer beds and located more than 35 miles away from the nearest hospital. This artificially enhanced supply of small hospitals inevitably exceeded the demand, resulting in low occupancy rates—only one-third of rural hospital beds are occupied.

To enable these hospitals to survive, the Medicare program pays them based on their costs rather than the usual Medicare rates, essentially covering the fixed costs uncoverable by their low patient volume.

Simply put, the federal government created redundant capacities in rural hospital markets and continues to fund these redundancies. As a result, patients ended up with low-quality, high-price local hospital care and often bypass it for larger, faraway options.

The population sorts itself to rural or urban areas based on individual human capital, skill set, and tastes. Fundamentally, access to healthcare, like access to other services and amenities, belongs to the broad structural rural-urban variations. Government interventions can create more problems than they solve.

Recognizing the key challenge of paying for the fixed costs of rural healthcare practices and facilities, government-induced and -subsidized capacity should focus on meeting what rural residents need the most, such as supporting satellite outpatient-only hospitals that offer 24-hour emergency and ambulance services and full-service hub hospitals. Regulatory restrictions should also be loosened on telehealth, pharmacies, and clinician practices to reduce operating costs.

The fixed costs incurred by healthcare businesses must be paid before they can provide patients with access to care, whether it be rural hospitals, inner-city pharmacies, or rare-disease therapies. Laudable and politically tempting aspirations to eliminate access disparity often compromise both patient access to quality care and accountability toward taxpayers.