Are Rural Hospitals Truly Rural? Only When Being Rural Pays

Ambulance car of emergency medical service leaving on rural dirt road in the middle of fields. Themes urgency, rescue and health care in remote location.

getty

The Centers for Medicare and Medicaid Services (CMS) will soon open applications for its $50 billion Rural Health Transformation Program, as authorized by the One Big Beautiful Bill Act. While rural hospitals are expected to benefit from this program, a new study published in Health Affairs shows that many so-called “rural” hospitals are actually located in urban areas.

Conducted by Yang Wang of Johns Hopkins, Jared Perkins and Christopher M. Whaley of Brown University, and myself, this study found that hundreds of urban hospitals, including many large nonprofit medical centers, have obtained “Medicare administratively rural” status. This designation gives them access to federal benefits intended for rural communities, such as lower thresholds for qualifying for the lucrative 340B Drug Pricing Program and expanded graduate medical education slots.

This trend began in 2017 following a CMS rule change and has since grown rapidly and steadily. By 2023, the number of these “administratively rural” but urban-located hospitals had reached 425, accounting for around one-third of community hospital beds in the U.S.

It’s tempting to blame hospitals, but they merely exploited a regulatory loophole triggered by two federal court rulings. Because this maneuver is relatively straightforward for large hospitals, a majority could soon claim “administrative rural” status, unless Congress intervenes.

When well-intentioned government benefits are tied to certain hospital designations, gamesmanship and other unintended consequences often follow. Subsidizing hospitals or other facilities does not necessarily translate to improved access and may even have the opposite effect. For example, federal financial support for small rural hospitals (designated as critical access hospitals) can distort competition and inflate hospital costs, without preventing hospital closure.

The fundamental problem with this facility-subsidizing approach is that rural areas often lack the population density and sustainable demand needed to support the financial viability of sophisticated facilities and medical specialists. Subsidized rural hospitals typically operate at very low occupancy rates, while local patients routinely bypass them to seek care in larger hospitals farther away.

In fact, a study published in the Journal of Health Economics found that the natural closure of low-performing rural hospitals can reduce patient mortality in the long run by channeling patients to better care options. At a minimum, subsidizing financially unsustainable facilities is an inefficient use of taxpayer dollars.

Just as rural areas provide a friendlier operating environment for Walmart than for Whole Foods, low-cost, flexible facilities and care delivery models hold the key to improving rural access to care. Examples include mid-level clinician practices (e.g., physician assistants, nurse practitioners, and midwives), mobile primary care and radiology services, telehealth, and emergency hospitals with advanced transport capability but no inpatient beds.

In Europe, area travel is much more affordable and accessible than in the U.S., primarily because of the EU’s Open Skies policy, which removed competition restrictions, liberated air transport markets, and promoted affordability and broad access. Similarly, opening rural healthcare markets to all providers could produce comparable results.

Rather than funding facilities that policymakers assume will help rural residents, taxpayer dollars should directly flow to rural residents in need. Health Savings Accounts and other flexible spending arrangements would empower patients and stimulate patient-centered care delivery and innovation.

The $50 billion Rural Health Transformation Program represents a rare opportunity to transform rural health in America. Amplified by rapid technological advances, directly funding patients and unleashing all providers to competition can organically create affordable, flexible, sustainable, and dynamic access that rural Amercians truly need.