Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Quietly Reshaping Rural Hospital Finances
Transcript
- Lucas: We talk a lot about stagflation hitting corporate margins, consumer wallets, supply chains. But there's a corner of the economy where the squeeze is both quieter and more literal — rural hospitals. Luna: Quieter in the sense that it doesn't make national headlines every day, but literal because people's access to care is on the line. Lucas: Exactly. So let's anchor in a specific case. There's a 25-bed critical access hospital in western Kansas — I'm not going to name it because the situation is still developing — that closed its obstetrics unit last month. No more delivering babies. The reason they gave was straightforward: they couldn't staff it and they couldn't afford to keep it open. Luna: And that's happening across the rural Midwest. But what's the stagflation angle specifically? Because hospital closures have been a trend for a while. Lucas: Right, but the velocity has changed. Let me give you two numbers. The April CPI reading — the all-items index — hit 332.4. That's up from 330.3 in March. Hospital supply costs — things like gloves, IV fluids, surgical kits — those have risen faster than the headline number. One industry survey I saw put medical supply inflation closer to 6 percent year-over-year. Luna: So their input costs are running at roughly double the core inflation rate. Lucas: Double. Meanwhile, their biggest payer is Medicare, which sets reimbursement rates based on a formula that's tied to broader economic indicators — and those rates are adjusted annually, not in real time. So while their costs spike in Q1, their revenue for that same period is based on a rate set the previous October. There's a lag — and in a stagflation environment, that lag becomes a chasm. Luna: And Medicare is non-negotiable, right? You can't decide to stop accepting Medicare patients if you're a critical access hospital — that's basically your whole business model. Lucas: Exactly. For most rural hospitals, Medicare and Medicaid make up 60 to 70 percent of patient volume. Private insurance — the kind that reimburses at higher rates — is a much smaller share. So the classic 'cost-shift' strategy, where hospitals charge private insurers more to make up for government underpayment, relies on having enough privately insured patients to shift costs onto. Luna: But in rural areas, the private insurance base is shrinking. More small businesses closing, more people moving to high-deductible plans or losing coverage altogether. Lucas: That's the demand-side of stagflation hitting rural hospitals. But there's also a supply-side energy shock layered on top. The Iran conflict — you saw the headline that the average U.S. household is paying $450 more per year on gas and energy. For hospitals, energy isn't just heating and lighting. It's running MRI machines, sterilizing equipment, maintaining temperature-controlled storage for medications. One rural hospital administrator in Nebraska told me their utility bill was up 22 percent year-over-year. Luna: Twenty-two percent. On a budget that's already thin. Lucas: And they can't pass that cost along. They can't raise the price of a C-section the way a restaurant can raise the price of a burger. Medicare says, 'This is what we pay.' Period. Luna: So what's the actual financial picture? Are we talking about operating losses, or is this pushing them into negative margins? Lucas: The data from the Chartis Center for Rural Health — which tracks this closely — shows that as of Q1 2026, more than 40 percent of rural hospitals in the U.S. are operating with negative margins. That's up from about 30 percent two years ago. And the ones that are barely in the black are only there because they've cut services — like closing the obstetrics unit, reducing lab hours, eliminating physical therapy. Luna: Every service cut makes the hospital less useful to the community, which drives more people to drive an extra hour for care, which reduces volume further. It's a vicious cycle. Lucas: It's textbook stagflation dynamics — rising input costs, stagnant or declining revenue, and a structural inability to adjust prices. But what makes it especially tricky is that the 'product' here is essential. You can't just say, 'Well, the market will sort it out.' Luna: Let me push back a little. Some economists argue that rural hospital closures are a feature, not a bug — that we've overbuilt capacity in low-density areas and consolidation is inevitable. Lucas: I've heard that argument. And there's some truth to it — on a pure efficiency basis, having a full-service hospital every 30 miles in the Great Plains doesn't make economic sense. But here's the problem: the closures aren't happening in a gradual, orderly way. They're happening in clusters, driven by the current macroeconomic shock, not by a long-term demographic plan. When a hospital closes suddenly, the nearest alternative might be 70 miles away. For a pregnant woman in labor, or a heart attack patient, that distance matters. Luna: And those 70-mile drives increase ambulance costs, which are often borne by the county — another layer of stagflation pressure on local government budgets. Lucas: Right, we did an episode on local government budgets a few weeks ago. This is exactly the kind of spillover effect that makes stagflation so insidious. The hospital closes, the county has to spend more on emergency transport, property values in the area drop — that shrinks the tax base — and then the school district has less money, and the cycle continues. Luna: I want to come back to the policy side in a minute. But first, there's a human-scale question I think our listeners might be wondering about. If you're living in one of these communities, what does this actually mean for your family's healthcare? Lucas: It means that for routine care, you're driving further. For emergencies, you're hoping the ambulance gets there fast enough and that the nearest hospital hasn't cut its ER hours. It means that preventive care gets delayed — because who wants to take a half-day off work to drive two hours for a check-up? And we know from past research that delayed preventive care leads to worse outcomes and higher costs down the line. So the spiral isn't just financial — it's a health spiral. Luna: Speaking of the human scale — and I say this because I know a lot of our listeners work in healthcare or live in smaller towns — if walking through these economic dynamics with us has made something click, or helped you see your own situation more clearly, that's exactly why we do this. And just a quick note: a couple of dollars a month is genuinely what keeps these conversations going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. No pressure, just know that it makes a real difference. Lucas: Yeah, it's listener support that keeps this ad-free and lets us drill into topics that don't get the attention they deserve. So thanks to anyone who chips in. Luna: Alright, back to policy. Lucas, you mentioned earlier that the reimbursement lag is structural. Is there any fix on the table? Lucas: There is a perennial proposal to shift Medicare's payment update from an annual cycle to a quarterly or semi-annual one — so that when inflation spikes, hospitals don't have to wait nine months for relief. It's been introduced in various forms in Congress a few times. It's never passed. The Congressional Budget Office usually scores it as costing money — because faster updates would mean higher payments in an inflationary period — and in a budget-constrained environment, it's a tough sell. Luna: So the policy fix is known, but the political will isn't there. Lucas: Exactly. And in the meantime, rural hospitals are doing what they always do — cutting costs, merging with larger systems, or converting to 'emergency-only' facilities. Some are even exploring a model called 'hospital without beds,' where they provide outpatient and emergency care but transfer inpatients elsewhere. It's creative, but it's a triage response, not a long-term solution. Luna: And we haven't even talked about workforce. The labor side of stagflation — we did an episode on wage growth — but for rural hospitals, they're competing with urban hospitals that can pay more, and with Amazon and Walmart for entry-level workers. Lucas: That's a huge piece. Average hourly earnings in the private sector hit $37.40 in April — up slightly, but not enough to attract nurses to rural areas when they can make $10 more per hour in a city. And with the unemployment rate at 4.3 percent — still historically low — labor is tight everywhere. Rural hospitals are losing the bidding war for staff. Luna: So you've got rising input costs, labor shortages, flat reimbursement, and shrinking patient volumes. It's a perfect storm. Lucas: It is. And the thing that makes it different from, say, the 1970s stagflation is that healthcare wasn't nearly as large a share of the economy back then. Today, health spending is about 18 percent of GDP. So when this sector gets squeezed, it has macroeconomic ripple effects — in employment, in state budgets, in household financial stress. Luna: I want to end on a forward-looking question. If you had to guess — based on the current trajectory — do you think we'll see a wave of rural hospital closures in 2027, or will something give? Lucas: I think we're already in that wave. The question is whether it crests or keeps building. If inflation stays sticky — and the core PCE reading of 3.3 percent in April suggests it's not going away quickly — and if energy costs remain elevated because of geopolitical tensions, then more hospitals will cross the line from barely surviving to closing. My worry is that the policy response will only come after enough closures create a visible crisis — a town losing its only hospital, a spike in maternal mortality — and by then, the infrastructure is gone. Luna: So it's a race between macro conditions and political attention. And right now, macro is winning. Lucas: That's the sad truth. And it's a reminder that stagflation isn't just a Wall Street story — it's a story about whether a community can still deliver a baby safely within 30 minutes of home.