Legal and Financial Issues in Small Hospital Failure: A Theoretical Framework for Avoiding Closure‪.‬

ABSTRACT The impact of the Prospective Payment System and increased enrollment in HMOs and PPOs has placed greater pressures on hospitals for discounts. In a market characterized by increased price competition, the most efficient hospitals will survive and others fail. An increase in the number and frequency of hospitals involved in merger activity suggests that merging is a way to become more efficient rather than closing. This paper presents a theoretical framework investigating the cost structure of merged and closed hospitals prior to mergers and closures and uses a cost differential model to determine all costs relevant in the decision to close or to merge. Pressure from patients and HMOs to lower costs has forced many community hospitals to consider closing. It is recommended that closing hospitals should consider merging in order to continue serving their community.