Urban Hospitals Reap Rural Benefits for Medicare Through Loophole

As rural hospitals struggle with mounting financial pressures, some of the biggest urban hospitals are tapping into rural Medicare benefits.

Large, urban hospitals are increasingly taking advantage of a regulatory loophole that allows them to be reclassified as rural under Medicare, according to a new study published in Health Affairs.

The number of dually classified hospitals jumped from three in 2017 to 425 in 2023, qualifying them for higher Medicare reimbursements and access to federal programs designed to strengthen rural health access, the analysis found.

Nationwide, the share of administratively rural hospitals among all acute care non-critical access hospitals increased from 27% in 2013 to 43% to 2023, while the share of administratively rural hospital beds skyrocketed from 13% to 45% during the same period.

In 2023, dually classified hospitals accounted for 61% of all beds in hospitals classified as rural for Medicare payments.

The trend is driven by a 2016 rule change from CMS following two federal appellate court decisions. The revised regulation allows urban hospitals to be classified as both rural and urban simultaneously, regardless of geographic location.

The financial implications are significant. Dually classified hospitals can receive enhanced Medicare payments tied to rural hospital designations, including eligibility for sole community hospital status, the 340B drug pricing program, and additional graduate medical education funding. At the same time, they retain urban payment advantages such as higher wage indexes and capital disproportionate share hospital payments.

These benefits have proven especially attractive to large nonprofit health systems and academic medical centers. The study found that 76% of dually classified hospitals in 2023 were nonprofits and all of the top 20 by net patient revenue were teaching hospitals in major metro areas, including NewYork-Presbyterian Hospital, Cleveland Clinic Hospital, and Cedars-Sinai Medical Center.

The practice is especially prevalent in states on the East Coast, such as Connecticut (84%), Massachusetts (81%), Florida (59%), Pennsylvania (58%), and New York (54%), and states in the West, such as Idaho (67%) and California (66%).

Meanwhile, many hospitals actually located in rural areas continue to be in peril. A report by Chartis earlier this year revealed that nearly half of rural hospitals (46%) are in the red, while 432 facilities are in danger of closure.

“To the extent that federal subsidies continue to play a critical role in the financial viability of geographically rural hospitals and other providers, it is essential to ensure that limited federal resources intended for rural health are directed to those hospitals,” the authors of the Health Affairs study conclude.

“To preserve the integrity and effectiveness of rural health policy, Congress should direct federal support to geographically rural hospitals, where it is most needed.”