The Quiet Shift Reshaping Rural Healthcare Funding: How Hospital Reclassification is Impacting Access and Medicare Spending
For decades, federal policies have aimed to bolster healthcare access in rural America, recognizing the unique challenges faced by these communities - an older, sicker population and financially vulnerable hospitals. Though, a concerning trend is quietly undermining these efforts: the increasing reclassification of hospitals as “rural” for administrative purposes, even when geographically located in major urban centers. This practice, fueled by recent legal changes, is diverting critical funding away from genuinely rural facilities and potentially exacerbating the ongoing crisis of rural hospital closures.
The Rise of “Dually Classified” hospitals
A recent study published in health Affairs reveals a dramatic surge in hospitals leveraging this reclassification. Between 2013 and 2023, the proportion of acute care hospitals classified as rural for payment purposes jumped from 27% to a staggering 43%. More substantially, the share of beds at these administratively rural hospitals skyrocketed from 13% to 45% over the same period. This indicates that the hospitals taking advantage of this designation are often larger, more established institutions, not the small, struggling facilities they were intended to help.
Historically, hospitals located in metropolitan areas were barred from concurrently benefiting from both rural and urban payment advantages. The Centers for Medicare & Medicaid Services (CMS) prevented reclassification back to urban status, ensuring they couldn’t “double dip” by claiming both higher rural reimbursement rates and urban wage index adjustments. However, two appellate court rulings in 2016 forced the CMS to reverse course, allowing hospitals to be classified as both urban and rural concurrently.Why are Hospitals Doing This? The Financial Incentives
The motivation is clear: financial gain. Hospitals classified as rural can access a range of benefits, including:
Higher Medicare Reimbursement Rates: Through programs like Sole Community Hospital and Rural Referral Center status, rural hospitals receive increased payments for Medicare services.
340B Drug discount Program Eligibility: Rural hospitals have an easier time qualifying for the 340B program, allowing them to purchase outpatient drugs at significantly reduced prices. Graduate Medical Education (GME) Slots: Rural hospitals receive a greater allocation of GME slots, supporting the training of new physicians.In 1999, Congress initially allowed urban hospitals to classify as rural to support institutions serving rural communities within metropolitan areas. The current situation, however, has gone far beyond that original intent.
The Consequences: A Widening Gap in Healthcare Access
This trend isn’t happening uniformly across the country. States along the East Coast – Connecticut, Massachusetts, Florida, Pennsylvania, and New York – have the highest concentration of these ”dually classified” hospitals.Conversely, states in the central and southern US, like Montana, Nebraska, and wyoming, have none.The implications are far-reaching.As more urban hospitals capture rural funding, genuinely rural facilities – already operating on thin margins – are increasingly squeezed. This contributes to the alarming rate of rural hospital closures, leaving communities with limited or no access to essential healthcare services. According to recent reports, hundreds of rural hospitals are at high risk of closing, further exacerbating health disparities.
Furthermore, the reclassification raises concerns about the integrity of programs like the 340B program. Dually classified hospitals may be able to qualify based on serving a large population of low-income patients, even if their actual patient base is less disadvantaged.This effectively dilutes the programS intended benefits for those who need them most.
What Needs to Be done? A Call for Legislative Action
The current trajectory is unsustainable. Without intervention from lawmakers, medicare spending will likely continue to flow towards geographically urban hospitals, while rural facilities struggle to stay afloat.
Potential solutions include:
Revisiting the Dual Classification Policy: Congress should consider amending the law to restrict or eliminate the ability of hospitals to simultaneously claim both rural and urban benefits.
Strengthening geographic Definitions: Clarifying the criteria for defining “rural” for payment purposes, focusing on actual geographic location and patient demographics.
Increased Oversight of 340B Program Eligibility: Implementing stricter verification processes to ensure that hospitals accurately reflect their patient populations.
* Targeted Funding for Rural Hospitals: Developing dedicated funding streams specifically for rural hospitals, addressing their unique financial challenges.
The health of rural America is at stake. Addressing this quiet shift in healthcare funding requires immediate attention and decisive action from policymakers to ensure that resources are directed to the communities that need them most. Ignoring this issue will onyl deepen the
