Objective: To test whether hospital closures hurt or help surrounding hospitals financially. Do hospital closures improve market efficiency or do they merely shift the least profitable patients to hospitals that can better cross-subsidize them? Methods: Using California hospital data from 2000 to 2011, the analysis employed random-effect and fixed-effect models to test for a change in operating margin before and after a series of 2004, 2007 and 2009 hospital closures (the highest volume years for closures). The main independent variable was each hospital's predicted percent increase in patient volume due to absorption from closing hospitals. We used 5-digit zip code and DRG patient flow data to predict the number of patients each open hospital would absorb from nearby hospital closures. Results: Hospitals experiencing the biggest increase in patient volume due to nearby hospital closings saw a drop in operating margin following those closures. This drop could not be explained by changes in payer mix or reimbursement type for those patients. Conclusions: Our results suggest that hospital closures are shifting high cost patients to open hospitals, not necessarily improving efficiency in the market.