The widespread use of telehealth during the pandemic has hit rural hospitals hard, as rural patients are choosing to see their doctors via telehealth at urban hospitals.

New research shines light on the effects telehealth is having on the finances and credit ratings of rural hospitals.

From the paper, called Virtual Competition and Cost of Capital: Evidence from Telehealth:

Financial statements indicate that rural hospitals lose patients to urban hospitals in the same state after states require equivalent reimbursement of remote and in-person services. These effects increase rural hospital bankruptcy risk indicated by leverage and Z-Score. This increased financial stress translates into lower credit ratings and a higher cost of capital for rural hospitals. Controlling for bond characteristics, we find that affected rural hospitals’ new bond costs rise by 20 – 38 bps relative to urban hospital bonds issued in the same state and in the same year. Secondary market yields of outstanding rural bonds increase by a significant 8 – 17 bps. Overall, we conclude that virtual competition in healthcare provision exacerbates healthcare inequality between rural and urban areas.

We provide evidence that residents in rural areas switch their care from in-person visits to their local rural hospital to virtual (remote) visits to distant urban hospitals. This revealed preference is prima facie evidence that urban hospitals’ telehealth services add value to residents of rural areas. Reducing travel costs (time and cash) for patients in need of urban specialists should allow greater productivity and discretionary income to improve the local (rural) economy. To the extent that competition encourages innovation, expanding the choice set of healthcare providers should mitigate deleterious effects of monopolistic supply.

This paper documents some unintended consequences of the telehealth parity laws that provide such benefits. The decline in patient revenues received by rural hospitals increases leverage and bankruptcy risk, lowers credit ratings, increases costs of capital, and decreases investment in physical capital (ICU beds), human resources (treatment unit employees), and new technology (HIT systems).