Welfare effects of rural hospitial closures: A nested logit analysis of the demand for rural hospital services

To demonstrate the discrete-choice, travel-cost approach to U.S. rural health policy evaluation, this paper presents a rural hospital demand model along with a welfare analysis of a rural hospital closure. The approach of this paper to estimating the welfare impacts of rural health policy changes follows the methods that environmental and resource economists have applied to value the provision of environmental quality, such as improvements of water quality (see, for example, Bockstael, Hanemann, and Kling). With rural hospital service provision containing public good characteristics, a discrete choice model of hospital choice is estimated, where time-costs serve to ration the choice between hospital alternatives. The resulting demand model is then applied to the analysis of changes in the attributes of the rural hospitals that the residents face. An estimate of the compensating variation is calculated using the approach suggested by Hanemann. In general, the results suggest that the welfare impacts of rural hospital closures on local residents seeking inpatient hospital services are significant. However, alternative policy instruments, such as subsidized medical transport or telemedicine technologies, may provide feasible means of mitigating the impact of rural hospital closures on medical care consumers.