Dive Brief:
A growing number of urban hospitals are benefitting from a nearly decade-old rule change that allows them to dually qualify as rural facilities, boosting their Medicare reimbursement, according to a new study published in Health Affairs.
The number of hospitals with rural classifications for administrative purposes rose from just three in 2017 to 425 in 2023, driven by providers in urban communities that classify in both groups, researchers found. Most of these dually classified facilities were nonprofits, including some large, urban academic medical centers.
The trend is likely to continue without intervention from lawmakers, potentially increasing Medicare spending on geographically urban hospitals — even as many rural facilities struggle financially and are at high risk of closure, the researchers wrote.
Dive Insight:
Congress has implemented a number of policies over the past four decades to boost access to care for rural Americans, who tend to be older and sicker compared with their urban counterparts. The policies are also meant to benefit rural hospitals, which tend to operate on slim margins, making them vulnerable to service reductions or closures.
For example, hospitals classified as rural for payment purposes by the CMS can apply for sole community hospital or rural referral center status, which garners higher reimbursement rates from Medicare, according to the Health Affairs study.
Additionally, it’s easier for rural hospitals to become eligible for the 340B drug discount program, and they receive more graduate medical education slots for training new physicians.
In 1999, Congress allowed hospitals in urban areas to classify as rural facilities for administrative purposes. Lawmakers argued some hospitals may be technically located in metropolitan areas but still serve rural communities, so they should be able to benefit from government programs that aim to improve rural health.
Still, the CMS used rulemaking to ensure hospitals that chose this option couldn’t reclassify themselves back to urban status, so they couldn’t also receive money from higher urban wage indexes and an add-on payment to Medicare disproportionate share payments reserved for urban hospitals.
But that changed in 2016 due to two appellate court rulings, pushing the CMS to change regulations so facilities could be classified as urban and rural simultaneously — allowing them to take advantage of benefits for both hospital types, researchers said.
The share of administratively rural hospitals among all acute care, non-critical access hospitals increased from 27% in 2013 to 43% in 2023, according to the study.
During that same time period, the share of administratively rural hospital beds rose significantly, from just 13% in 2023 to 45% a decade later, suggesting that newer administrative rural hospitals are much larger.
Meanwhile, the share of geographically urban hospitals and the number of beds at these facilities held relatively stable.
Dually classified hospitals were most common in states in the East Coast, like Connecticut, Massachusetts, Florida, Pennsylvania and New York. They weren’t as prevalent in central and Southern states. For example, Montana, Nebraska and Wyoming had no dually qualified facilities.
Additionally, many of the dually classified hospitals with the highest net patient revenue — like NewYork Presbyterian Hospital, Cleveland Clinic Hospital and AdventHealth Orlando — were located in large metropolitan areas like New York City and Los Angeles, according to the research.
The rise in dually classified hospitals could have significant implications for government healthcare programs, like 340B, which allows healthcare providers that serve large populations of low-income patients to buy outpatient drugs at a significantly discounted rate, researchers said. Dually classified hospitals could effectively provide services for fewer low-income patients and still qualify.
