Why Do Nursing Homes Shut Down? Unpacking the Key Causes

Oct 16, 2025 4 min read •

long-term care elder care healthcare

According to the American Health Care Association (AHCA), over 770 nursing homes closed between February 2020 and July 2024, displacing thousands of residents. Families and communities are often left reeling when facilities shutter their doors, leaving many to wonder why do nursing homes shut down so frequently. The reasons are complex, stemming from a perfect storm of financial distress, workforce crises, and shifts in resident preferences.

Quick Summary

Nursing homes close due to chronic financial shortfalls, exacerbated by low government reimbursement rates and high operating costs. A severe and persistent workforce crisis, regulatory enforcement, quality of care problems, and a growing patient preference for home-based care also contribute to the closures.

Key Points

Financial Stress: Low Medicaid reimbursement rates and rising operational costs are major factors that cause nursing homes to lose money and close down.
Staffing Crisis: A severe and persistent shortage of qualified healthcare workers leads to burnout, limited admissions, and potential closure for many facilities.
Regulatory Issues: Repeated quality of care deficiencies and violations can trigger government intervention, leading to fines, sanctions, and eventual shutdown.
Declining Occupancy: The growing preference for home-based care and aging in place has led to lower occupancy rates, making many facilities financially unsustainable.
Market Conditions: Factors like competition, location (especially rural areas), and facility size can increase a nursing home's vulnerability to closure.
Policy Changes: Shifts in government policy, including potential staffing mandates and how Medicaid funds are allocated, can intensify the pressures on nursing homes.

The Pervasive Financial Struggles

Financial difficulties are arguably the most significant driver behind nursing home closures, particularly for facilities heavily reliant on government funding programs. The core of this issue lies in the disparity between the cost of providing quality care and the revenue generated, leading to unsustainable business models.

Insufficient Medicaid Reimbursement: Medicaid is the primary payer for the majority of long-term nursing home residents, covering over 60% of residents nationally. However, reimbursement rates for Medicaid often fail to cover the actual cost of care, with some facilities reporting rates covering only 70% to 80% of expenses. This funding gap creates a financial strain that is nearly impossible for some facilities, especially smaller, rural, or independent ones, to overcome.
Increasing Operating Costs: Inflation and rising expenses for everything from supplies to insurance have strained nursing home budgets. The cost of personal protective equipment (PPE) and testing during the COVID-19 pandemic also increased expenditures substantially.
Decreasing Occupancy Rates: The preference for aging in place and the growth of home- and community-based services have led to declining nursing home occupancy rates in recent years. Lower occupancy directly reduces revenue, making it difficult for facilities to remain profitable, especially for smaller homes.

The Lingering Workforce Crisis

The healthcare workforce has been in crisis for years, with nursing homes feeling the impact more than most other sectors. This widespread staffing shortage directly contributes to closures.

Exodus of Staff: The COVID-19 pandemic accelerated the departure of many nursing home employees due to burnout, challenging working conditions, and low wages. Even with increased wages and bonuses, many facilities struggle to attract and retain enough qualified staff.
Impact on Admissions: A lack of adequate staffing forces facilities to limit or freeze new admissions, which further reduces revenue. This creates a bottleneck in the healthcare system, as hospitals cannot discharge patients waiting for a nursing home placement.
Mandated Staffing Ratios: Regulations, such as federal staffing mandates, place additional pressure on facilities. While intended to improve care, providers argue these mandates are unfunded and could accelerate closures, especially for facilities already struggling to find workers.

Quality of Care and Regulatory Enforcement

Poor quality of care and compliance issues can lead to regulatory action that forces a facility to close. This can be a proactive measure by the state to protect residents from harm.

Inspection Violations: Facilities with a history of serious inspection violations are more likely to close. Consistent failures to meet health and safety standards can result in penalties, sanctions, and eventual closure by federal and state regulators.
Special Focus Facilities (SFFs): Facilities identified as SFFs due to a history of severe deficiencies are at higher risk of closure. If they fail to improve their performance, they can be terminated from Medicare and Medicaid, effectively forcing a shutdown.
Voluntary Exits: Some facilities voluntarily exit the publicly financed market, sometimes because they are unable or unwilling to meet increasingly stringent quality regulations. This can be a strategic move to focus on private-pay residents or a direct result of being unable to operate profitably under existing rules.

The Shift Toward Home- and Community-Based Care

Patient preferences and policy changes are fundamentally reshaping the long-term care market, impacting the demand for traditional nursing home services.

Consumer Preference for "Aging in Place": More older adults and their families prefer home-based care over institutional settings. This shift is driven by a desire for independence, comfort, and a familiar environment.
Cost-Effective Alternatives: In many cases, home- and community-based services can be a more cost-effective option than nursing home care. Payer models, including Medicaid waivers, are increasingly directed toward these alternatives, further reducing the financial viability of nursing homes.
Policy Rebalancing: Some states are actively rebalancing their long-term care systems to increase the use of home- and community-based alternatives, which can diminish demand for nursing home beds and exacerbate occupancy challenges.

Comparison Table: Factors Behind Nursing Home Closures


Factor	Financial Distress	Workforce Crisis	Regulatory Enforcement	Shift in Care Preferences
Primary Cause	Low Medicaid reimbursement, high operating costs, and declining occupancy.	Staffing shortages, high turnover, and burnout among caregivers.	Consistent and severe quality of care deficiencies and inspection violations.	Increased demand for home- and community-based services and aging in place.
Impact on Operations	Negative operating margins, bankruptcy risk, and difficulty funding improvements.	Forced limits on admissions, closure of units, and strain on existing staff.	Sanctions, penalties, and potential termination of Medicare/Medicaid certification.	Declining occupancy, reduced revenue, and market pressure on facilities.
Affected Facilities	Smaller, independent, and rural facilities, especially those with high Medicaid occupancy.	Most facilities, but disproportionately impacts those with fewer resources to offer competitive wages.	Poorly performing facilities with a history of citations or in the SFF program.	Facilities in areas with robust home-care alternatives and a population preferring non-institutional care.

Conclusion

The closure of a nursing home is rarely the result of a single event but rather a confluence of systemic and facility-specific problems. Chronic underfunding, particularly from Medicaid, creates a financially precarious environment, which is then made worse by severe, nationwide workforce shortages that challenge operational capacity. Compounding these issues are regulatory actions that can force closures for poor performance and a broader societal shift towards home-based care, which reduces demand for institutional beds. Addressing the crisis requires a multi-pronged approach that tackles reimbursement issues, workforce development, and quality oversight. Ignoring these interconnected factors will only accelerate the trend of closures, threatening access to care for vulnerable seniors, especially in rural and underserved areas.

For more in-depth information on nursing home regulations and oversight, a useful resource is the KFF report on nursing home regulation.

Frequently Asked Questions

The main financial reason nursing homes shut down is the gap between the cost of care and inadequate reimbursement, especially from Medicaid. Since Medicaid covers a majority of residents but often pays less than the cost of care, facilities operate at a financial loss and struggle to remain viable.

Staffing shortages directly cause closures by limiting a facility's capacity. When there are not enough qualified staff members, facilities must limit or freeze new admissions to maintain safe care levels. This reduces revenue, further destabilizing the facility and potentially forcing a shutdown.

Yes, poor quality of care can lead to a nursing home closing. Facilities with repeated, severe inspection violations can be placed in a special focus program and eventually lose their certification for Medicare and Medicaid. Losing this funding source often makes continued operation impossible.

Many patients and families now prefer home-based care because it allows older adults to age in the comfort and familiarity of their own homes. Home care can also be more personalized and cost-effective, offering an attractive alternative to institutional settings.

Yes, rural nursing homes are often more at risk of closure. They face unique challenges, including a smaller workforce pool, and residents in these areas may have fewer alternative care options if a facility shuts down.

When a nursing home closes, residents are relocated, which can cause significant stress, sometimes called 'transfer trauma'. The facility is required to provide written notice and help with discharge planning to ensure a safe transition for all residents.

Yes, even nursing homes with high ratings sometimes close. Factors like unsustainable financial models, workforce challenges, or market shifts can affect facilities of any quality rating, though lower-quality homes are more likely to face regulatory closures.

References

Medical Disclaimer

This content is for informational purposes only and should not replace professional medical advice. Always consult a qualified healthcare provider regarding personal health decisions.