This article was originally published by the American Association of Provider Compensation Professionals.

Summary: Labor and delivery (L&D) unit closures are increasing across U.S. rural hospitals due to workforce shortages, low Medicaid reimbursement, and financial pressures, contributing to maternity care deserts. These obstetric (OB) unit closures are reshaping physician compensation by driving higher demand and market rates for OB/GYNs, shifting care toward laborist models, and reducing productivity and income for other providers. As care regionalizes, healthcare organizations should adapt compensation strategies to stay competitive, compliant, and financially sustainable.

Across the U.S., the closure of hospital labor and delivery (L&D) units has become an increasingly visible indicator of the financial and workforce challenges facing healthcare systems. During the past several years, a growing number of community and rural hospitals have discontinued obstetric (OB) services, creating what policymakers and researchers increasingly describe as “maternity care deserts.” According to Chief Healthcare Executive, fewer than half of rural hospitals nationwide offer labor and delivery services.

While much of the public discussion focuses appropriately on patient access and maternal health outcomes, L&D closures are fundamentally reshaping provider compensation, recruitment, and valuation. These closures create ripple effects that reshape provider compensation models across multiple specialties, including obstetricians, family medicine physicians, hospitalists, anesthesiologists, and certain surgical specialties.

For healthcare leaders, understanding these interconnected impacts is essential to maintaining alignment, supporting provider retention, and ensuring financial sustainability.

Key Drivers Behind Labor and Delivery Closures in Hospitals

Understanding compensation implications requires understanding why L&D units are closing. Several structural factors have converged to make OB services financially challenging for many regional hospitals:

• Declining birth rates in rural communities
• Low Medicaid reimbursement for OB care
• Rising staffing costs for nurses and providers
• Difficulty recruiting OB providers
• High malpractice insurance costs

These pressures have led hospitals to re-evaluate the sustainability of OB programs. According to Becker’s Hospital Review, nationally nearly 124 rural OB units have closed since 2020 or are planning to close. Some states are hit harder than others. As tracked by the Indiana Hospital Association, 16 Indiana-based OB departments have closed since 2020.

In some cases, the closures reflect financial losses tied to low delivery volumes. In others, hospitals simply cannot recruit enough OB providers to safely staff a unit.

For provider compensation specialists, these closures represent more than operational decisions; the closures fundamentally change the economic structure of the provider workforce in affected regions.

How Labor and Delivery Closures Are Changing Obstetrician Compensation Models

The impact on obstetrician compensation is taking shape in two key ways: increased regional demand driving market rate pressure and a shift toward laborist-based care models.

Increased Regional Demand and Market Rate Inflation

When a hospital closes its L&D unit, deliveries typically shift to nearby regional centers. This concentration of OB volume often increases demand for obstetricians at receiving hospitals.

In practical terms, this can lead to the following:

• Higher base salary offers for OB/GYN physicians
• Increased call pay or shift stipends
• Larger signing bonuses and recruitment packages

Hospitals absorbing additional deliveries must maintain 24/7 coverage. If patient volumes rise significantly, they may need additional physicians or laborists to handle the workload. As a result, market compensation comparables in the region may rise over time.

From a valuation standpoint, compensation consultants must consider whether higher salaries reflect fair market value (FMV) or represent recruitment-driven premiums tied to market scarcity.

Shift Toward Laborist Models

Another compensation impact involves the growth of the laborist model. For larger hospitals absorbing deliveries from surrounding communities, laborist programs can provide in-house OB coverage through shift-based physicians.

This shift in provider staffing affects compensation structures in several ways:

• Compensation becomes shift-based rather than productivity-based.
• Models based on work relative value units (wRVUs) may become less relevant.
• Call coverage compensation becomes integrated into base pay.

Laborists typically have predictable schedules and reduced call responsibilities compared to traditional private-practice OB/GYN models. This structure can appeal to younger physicians seeking improved work-life balance – an issue cited by rural hospitals struggling to recruit obstetricians.

The emergence of laborist models requires careful market analysis against national and regional compensation surveys.

How Labor and Delivery Closures Affect Family Medicine Physicians With OB Training

Historically, many rural hospitals relied on family medicine physicians with OB training to support L&D units. When those units close, these physicians face several compensation challenges.

Loss of OB Productivity

Family medicine physicians who perform deliveries generate additional wRVUs. When L&D services disappear, those physicians lose a significant portion of their productivity.

Compensation implications include:

• Reduced total wRVU production
• Lower incentive compensation
• Reconfiguration of employment or independent contractor agreements

Hospitals must decide whether to implement the following strategies:

• Maintain prior compensation levels to preserve workforce stability
• Transition physicians to primary-care-only productivity models
• Offer stipends for prenatal care without delivery services

In some cases, physicians may leave communities entirely if the OB practice was a central component of their professional identity and compensation opportunity.

How Labor and Delivery Closures Affect Hospital-Based Specialists

The closure of an L&D unit does not affect only obstetricians. Several other physician specialties are indirectly impacted.

Anesthesiology Compensation Impacts

Labor epidurals represent a meaningful portion of anesthesia service line volume in many hospitals. Eliminating L&D removes a predictable stream of cases.

Compensation implications may include:

• Lower anesthesia case volume
• Reduced professional fee collections
• Greater reliance on hospital subsidies

For anesthesia groups operating under professional services agreements, L&D closures may increase the financial support required from hospitals to maintain fair market compensation.

Pediatric and Neonatology Compensation Impacts

Hospitals without delivery services no longer require in-house newborn care coverage. Pediatricians who previously performed newborn rounds may see declines in clinical volume.

In smaller communities, this could alter compensation models, particularly if pediatric practices relied on hospital-based work to supplement outpatient care.

Conversely, regional referral centers receiving deliveries may experience increased demand for neonatology services.

Emergency Medicine Compensation Impacts

Research published in a 2022 Journal of the American Medical Association study has shown that communities losing OB services sometimes experience an increase in births occurring “out-of-hospital” (including emergency departments). This increase was most pronounced in rural and underserved communities where alternative delivery locations were not available.

While these cases remain relatively rare, emergency departments are not designed or staffed for routine deliveries. Because of that, patients may face higher rates of complications and reduced access to neonatal support, and providers may face higher clinical risk and malpractice exposure. Hospitals may respond by adjusting compensation for emergency department coverage or implementing transfer protocols.

How Labor and Delivery Closures Are Changing Provider Recruitment Economics

One of the most significant compensation implications involves provider recruitment. Communities that lose L&D units often become less attractive to OB providers. Without a hospital delivery program, OB/GYN physicians may be unwilling to practice locally.

As a result, hospitals may be forced to adjust their recruitment strategies to include:

• Offering higher compensation packages
• Offering more lucrative recruiting incentives
• Providing relocation assistance
• Partnering with regional systems for rotating coverage

From a valuation standpoint, hospitals must determine that recruitment incentive packages and overall compensation remain within FMV and commercial reasonableness parameters.

Valuation Considerations for Compensation Consultants

For healthcare valuation professionals, L&D closures create several technical challenges.

FMV Analysis

Provider compensation must reflect FMV and commercial reasonableness. However, when local and regional supply shortages occur, market levels of compensation may rise rapidly.

Healthcare valuations professionals should consider the following:

• Regional supply and demand dynamics
• Shifts in provider productivity expectations
• Changes in provider call coverage burden
• Hospital financial support requirements

National surveys alone will not capture these localized market conditions.

Commercial Reasonableness Assessment

In communities losing OB services, hospitals may still employ or contract with OB/GYN providers to provide prenatal care even without delivery services.

Compensation arrangements may remain commercially reasonable if they support community access to care, even if provider productivity and associated work effort declines.

Hospitals should document such community access considerations as support for the provider relationships and associated compensation value.

Service Line Profitability

The financial losses associated with OB programs often contribute directly to their closure. OB units typically lose money due to structural dynamics, including high fixed costs (OB providers, anesthesia, cesarean section capability, and specialized nursing), poor payer mix (predominantly Medicaid), low delivery volumes, and malpractice costs.

When a hospital eliminates an unprofitable service line, provider compensation arrangements should be reassessed across related specialties.

Strategic Implications for Health Systems

Unfortunately, L&D closures are likely to continue. As hospitals and health systems adopt strategic responses, provider compensation models should be evaluated and adjusted accordingly.

Regionalization of OB Care

Deliveries may increasingly concentrate in larger hospitals capable of supporting higher patient volumes. This regionalization can lead to larger OB physician groups, increased laborist staffing models, and concentration of call coverage – all of which may require adjustments to provider compensation models.

Growth of Midwife and Advanced Practice Models

Some communities are responding to OB shortages by expanding midwife-led prenatal care and postpartum services. These models may reduce physician workloads but require careful integration into provider compensation frameworks.

Telehealth and Prenatal Care Networks

Hospitals may maintain prenatal clinics in communities without delivery services while transferring patients to regional hospitals for childbirth. Provider compensation models may evolve to incorporate telehealth consultations, shared coverage arrangements, and multisite employment structures.

What Health Systems Should Do as Provider Compensation Models Evolve

The closure of labor and delivery units reflects broader structural challenges in healthcare financing and workforce availability, and its effects extend well beyond access to care. These changes are reshaping provider compensation and valuation across multiple specialties, introducing new complexity in how organizations structure, benchmark, and sustain physician pay. As hospitals and health systems adapt to these realities, compensation strategies should evolve alongside shifting care delivery models to remain fair, compliant, and competitive.

KSM’s healthcare consultants help organizations navigate these changes by evaluating compensation structures, addressing valuation considerations, and aligning strategies with today’s market dynamics. If your organization is assessing the impact of labor and delivery closures, now is the time to take a more strategic approach. Connect with KSM’s healthcare consulting team using the form below to discuss how these dynamics may impact your organization and how to respond effectively.

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