Urban hospitals claim rural status for Medicare gains

In a dramatic shift enabled by a regulatory change in 2016, hundreds of hospitals located in urban areas have secured “administratively rural” status for Medicare purposes—unlocking benefits designed to support care in genuinely rural communities. A new study, published in August in Health Affairs, used CMS Medicare cost reports and impact files to analyze hospital classifications from 2013 through 2023.

The study reveals that the number of these dually classified hospitals has grown from just three in 2017 to 425 in 2023.

These hospitals, located in metropolitan areas, can now avail themselves of the larger panoply of rural and urban Medicare classifications. It is in light of such dual classification that Medicare reimbursement under urban wage indexes may be enhanced for them. Simultaneously, they also avail themselves of the federal programs aimed at supporting rural health care access, which include more generous Medicare payments, drug price discounts, and extra graduate medical education funding.

The rule change, which stemmed from two federal court decisions in 2015 and 2016, effectively permitted hospitals to use a two-step reclassification process to be designated as both urban and rural in the eyes of Medicare. As a result, urban hospitals can maintain their high urban wage index for standard payments while also qualifying for special rural designations, such as Sole Community Hospital or Rural Referral Center—statuses that come with significantly higher reimbursements.

"This is a striking example of unintended policy consequences," said Ge Bai, co-author of the study and professor at both the Johns Hopkins Carey Business School and Bloomberg School of Public Health. "Congress enacted these programs to expand care in underserved rural areas, but they end up diverting billions of taxpayer dollars away from those communities to support large urban hospitals."

The research showed that the number of hospital beds in dually classified facilities rose from fewer than 400 in 2017 to more than 162,000 in 2023, now representing 61% of all beds in administratively rural hospitals nationwide. In 2023, three-quarters of the 425 dual-classified hospitals were nonprofits, and all of the top 20 highest-revenue facilities with dual status were teaching hospitals, with net patient revenues ranging from $2.9 billion to over $9 billion. Notably, New York-Presbyterian Hospital, with 2,850 beds and nearly $9.3 billion in patient revenue, topped the list.

"According to our study, the large, urban hospitals are increasingly taking advantage of this regulatory mechanism to derive rural benefits," Yang Wang, co-author of the study and assistant research professor in the Department of Health Policy and Management at the Johns Hopkins Bloomberg School of Public Health, explained. "It raises important policy questions regarding fairness and effective targeting of federal resources that are limited and meant to support truly rural hospitals, many of which are struggling to stay open."

The geographic distribution of dual-classified hospitals is also unequal, with states like Connecticut, Massachusetts, and California experiencing the highest percentages of urban hospitals reclassified as rural. Conversely, several states, including Alaska, Montana, and Wyoming, did not have any dual-classified hospitals.

While the practice is still considered legal under Medicare regulations, it raises significant questions about its consequences. These urban-type hospitals are now accorded the benefit under programs like the 340B Drug Pricing Program, which set lower eligibility benchmarks than those set for their urban classified counterparts. For instance, they only need an 8% DSH adjustment percentage while that of the urban hospitals is 11.75%, which means they can serve fewer low-income patients and still be eligible for discounts.

Meanwhile, rural hospitals, which often face workforce shortages and tight finances, are struggling to stay open. Previous studies have shown that more rural hospitals are closing, worsening health inequalities for people living in rural or remote areas.

The study urges policymakers to reconsider the eligibility criteria for rural health programs

“As we confront rural health challenges in America, federal subsidies must be precisely targeted at hospitals truly serving rural populations,” Bai added. “Policymakers have a duty to protect the integrity of rural health programs and remain accountable to taxpayers.”

The authors include researchers from Johns Hopkins University and Brown University. The study was supported by Arnold Ventures and PatientRightsAdvocate.org.

By Lindsey Culli

An earlier version of the article appears on the Johns Hopkins Bloomberg School of Public Health website.