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Problem definition: The recent upward trend in the U.S. hospital closures can have important impacts on the healthcare sector by changing the operational efficiency and quality of care of the remaining hospitals. Understanding how hospital closures impact the way the remaining hospitals operate can allow policymakers to utilize more effective policy levers in order to mitigate the negative consequences of hospital closures. We investigate the impact of hospital closures on the surrounding hospitals’ operational efficiency and quality, and study how such hospitals respond to the closure of their neighboring hospital. Methodology/results: We analyze more than 14 million inpatient visits made during 8 years to over 3,000 hospitals in the U.S. (before and after various closures), and utilize longitudinal causal inference methods to evaluate the spillover effect of hospital closures on the nearby hospitals. We also conduct counterfactual analyses to evaluate policy interventions that could have been used by policymakers. Our results show that hospital closures have both positive and negative spillover effects. When a hospital closes, its nearby hospitals improve their operational efficiency. However, they do so via a speed-up response (i.e., by reducing their average service duration) instead of an effort to lower their average bed idle time, and this response occurs regardless of whether or not their baseline bed utilization rate is high. Importantly, however, this speed-up response negatively affects some aspects of quality of care, including the 30-day mortality rate. Finally, we find that the spillover effect of a hospital closure is highly heterogeneous: nearby hospitals that are more desirable (e.g., high-quality, urban, and teaching) tend to experience greater spillover effects on their operational efficiency. Such effect widens social disparities by increasing the efficiency gap between the more and less desirable hospitals. Managerial Implications: Our analyses suggest two effective levers for policymakers that should be applied to specific hospitals: (a) bailing out from potential closures, and (b) eliminating the speed-up response. In addition to helping policymakers by identifying these levers and the specific hospitals to which they should be applied, our results help hospital administrators. Specifically, our findings allow them to better understand the consequences (or the absence) of various strategic responses to a neighboring hospital closure, thereby enabling them to adopt more suitable management strategies.