Fixed‐to‐total cost ratio is predictive of rural hospital financial distress and closures

PURPOSE: Cost structure, the proportion of fixed-to-total costs, plays a central role in rural hospital financial viability. Rural hospitals face unique challenges due to low volumes and limited flexibility in reducing fixed costs. This study evaluated variation in cost structures across rural hospital categories and assessed whether fixed-to-total cost ratios are associated with financial distress and closure. METHODS: We analyzed 2394 rural hospitals using the CMS Healthcare Cost Report Information System data from 2011-2023. Hospitals included 1200 Critical Access Hospitals (CAHs), 870 rural Prospective Payment System (PPS) hospitals, and 224 Rural Referral Center (RRC) hospitals. Fixed-to-total cost ratios were estimated using a mixed-effects regression framework and examined by hospital category, Financial Distress Index (FDI) category, and closure status. FINDINGS: Rural hospital categories exhibited substantial variation in cost structures. CAHs had the highest average fixed-to-total cost ratios (80.6%), followed by rural PPS hospitals (73.6%), and RRC hospitals (58.2%). Higher ratios consistently aligned with a higher risk of financial distress. Hospitals in the highest-risk FDI category and those that closed had higher fixed-to-total cost ratios than other rural hospitals. Differences were most pronounced between rural PPS and RRC hospitals. CONCLUSIONS: Cost structure is a strong indicator of rural hospital vulnerability. Hospitals with heavier fixed cost burdens are less able to adapt to declining volumes, making them more susceptible to financial distress and closure. Regular monitoring of fixed-to-total cost ratios can support policymakers and health system leaders in designing payment models and interventions that strengthen the stability of rural hospitals.