Jordan Ellis
Rural hospitals are vital to the health and economic stability of their communities, but they face financial challenges that threaten access to care for the millions of Americans living in rural areas. Medicare, a federal health insurance program for people over 65 and others with disabilities or specific diseases, provides special payment designations for rural hospitals, such as Critical Access Hospitals (CAHs), which are reimbursed based on their costs. However, Medicare Advantage (MA) plans, which now account for more than half of total Medicare enrollment, have been reported to reimburse rural hospitals at lower rates than traditional Medicare, causing payment delays and denials and creating significant administrative hurdles. These factors, along with low Medicaid reimbursement rates, threaten the financial viability of rural hospitals and put the accessibility and quality of healthcare in these communities at risk.
| Characteristics | Values |
|---|---|
| Traditional Medicare | Includes special payment designations targeted towards rural hospitals that can increase payments through inpatient and outpatient prospective payment systems (IPPS) |
| Medicare Advantage | Accounts for a rising share of discharges across the nation, growing more rapidly in nonmetropolitan areas, and may pose additional challenges for rural hospitals |
| Reimbursement rates | Traditional Medicare often pays less than the cost of care, and Medicare Advantage plans pay even less |
| Payment delays | Delayed payments from Medicare Advantage worsen rural hospitals' finances and increase administrative burdens |
| Administrative burdens | Medicare Advantage plans impose significant administrative hurdles on rural hospitals |
| Special rural designations | Federally Qualified Health Centers (FQHCs) are important safety net providers for rural communities and can receive reimbursement from Medicare under a Prospective Payment System (PPS) |
| Disproportionate Share Hospital (DSH) | A special reimbursement designation under Medicare and Medicaid designed to support hospitals that provide care to a disproportionate number of low-income patients |
| Critical Access Hospital (CAH) | Rural hospitals maintaining no more than 25 acute care beds and located at least 35 miles from the nearest hospital; reimbursed based on allowable costs |
| Sole Community Hospitals (SCHs) | Hospitals that are the only source of short-term, acute inpatient care in a region; Medicare reimburses some SCHs at higher rates than they would receive under IPPS |
| Medicare-Dependent Hospital (MDH) | A designation that provides enhanced payment to support small rural hospitals with 100 or fewer beds, for which Medicare patients make up at least 60% of inpatient days or discharges |
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What You'll Learn
- Medicare Advantage reimburses at lower rates than traditional Medicare
- Low Medicaid reimbursement rates threaten rural hospital services
- Special payment designations for rural hospitals
- Federally Qualified Health Centers (FQHCs) receive reimbursement from Medicare under a Prospective Payment System
- Medicare-Dependent Hospitals (MDHs) are small rural hospitals with high Medicare inpatient shares
Medicare Advantage reimburses at lower rates than traditional Medicare
Rural hospitals are vital to the health and economic stability of their communities, serving as lifelines for care and major local employers. However, these hospitals face financial challenges that threaten access to care for the millions of Americans living in rural areas. One of the key challenges is the rapid expansion of Medicare Advantage (MA) plans and the impact of certain MA practices on rural hospitals.
Medicare Advantage plans reimburse at lower rates than traditional Medicare. According to industry benchmark data, MA plans pay only 90.6% of Traditional Medicare rates on a cost basis. This reimbursement rate is well below the cost of care, and it poses significant financial challenges for rural hospitals, many of which already operate on thin margins. The American Hospital Association has confirmed that Medicare Advantage reimburses rural hospitals at lower rates than traditional Medicare on average.
Traditional Medicare includes special payment designations targeted towards rural hospitals that can increase payments. These designations include Critical Access Hospitals (CAHs) and Medicare-Dependent Hospitals (MDHs). CAHs are rural hospitals with a maximum of 25 beds that are located a minimum distance from other facilities. Medicare pays CAHs 101% of inpatient and outpatient costs, resulting in higher payments for these hospitals. MDHs are small rural hospitals with high Medicare inpatient shares, and Medicare pays them higher rates based on historical costs if they are greater than inpatient prospective payment system (IPPS) rates.
In contrast, MA plans do not provide the same level of financial support to rural hospitals. They do not pay rural emergency hospitals (REHs) monthly facility payments, which are available under traditional Medicare. Additionally, providers have reported that they do not receive increased MA payments equivalent to the payment bumps under traditional Medicare rural payment designations. This discrepancy in reimbursement rates between MA and traditional Medicare has contributed to financial strain and even closures of rural hospitals.
While MA plans offer some benefits, such as lower out-of-pocket expenses for enrollees, the lower reimbursement rates and payment delays or denials create significant challenges for rural hospitals. These issues, combined with existing difficulties like staffing shortages and low patient volumes, jeopardize the ability of rural hospitals to provide essential services to their communities. Addressing the impact of MA reimbursement rates on rural hospitals is critical to safeguarding healthcare access in these underserved areas.
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Low Medicaid reimbursement rates threaten rural hospital services
Rural hospitals are vital to the health and economic stability of their communities, serving as lifelines for care and major local employers. However, these hospitals face mounting financial pressures that threaten their ability to provide essential services. Low Medicaid reimbursement rates are a significant contributor to these financial challenges.
Medicaid is a vital source of health insurance coverage for Americans living in rural areas, including children, parents, seniors, individuals with disabilities, and pregnant women. It also provides secondary coverage for many beneficiaries who are dually enrolled in Medicare. In 2023, Medicaid covered 47% of births in rural areas, and births are the most common reason for hospital inpatient stays. Despite the importance of Medicaid funding to rural hospitals, reimbursement rates are often well below the cost of care.
For example, in 2024, Medicaid paid rural hospitals approximately 63 cents on the dollar for inpatient obstetrics care. Additionally, Medicaid payments covered only about 70% of the costs for behavioral health services in hospital settings. Low reimbursement rates from Medicaid can lead to financial instability for rural hospitals, threatening their ability to continue operating and providing essential services to their communities.
Congressional lawmakers are currently considering cuts to the Medicaid program, which could further reduce reimbursement rates and have devastating consequences for rural hospitals. The proposed changes are estimated to result in a $50.4 billion reduction in federal Medicaid spending on rural hospitals over ten years. These cuts could lead to more hospital closures and the elimination or reduction of critical services, such as obstetrics, behavioral health, and emergency medical services.
The impact of low Medicaid reimbursement rates is exacerbated by the rapid expansion of Medicare Advantage (MA) plans in rural areas. MA plans have been reported to reimburse rural hospitals at even lower rates than traditional Medicare, with delays and denials in payments, creating additional financial strain for rural hospitals.
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Special payment designations for rural hospitals
Traditional Medicare includes special payment designations targeted towards rural hospitals that can increase payments through inpatient and outpatient prospective payment systems (IPPS), reimbursing hospitals based on their costs, or providing monthly facility payments. These designations are not permanent but have been renewed over time.
One such designation is Critical Access Hospitals (CAHs), which are rural hospitals with a maximum of 25 beds that are located a minimum distance from other facilities (with some exceptions) and meet other requirements. CAHs receive an estimated $3 to $4 billion in higher payments annually and are reimbursed based on their allowable costs. Medicare pays CAHs 101% of inpatient and outpatient costs, although with sequestration, it may reimburse below cost.
Another designation is Sole Community Hospitals (SCHs), which are hospitals that are the only source of short-term, acute inpatient care in a region. Medicare reimburses some SCHs at higher rates than they would receive under IPPS, including based on historical costs. SCHs receive $0.8 billion in higher payments annually, including low-volume adjustments.
Medicare-Dependent Hospitals (MDHs) are another designation for small rural hospitals with high Medicare inpatient shares. Medicare pays MDHs higher rates based on historical costs if they are greater than IPPS rates. MDHs receive $0.1 billion in higher payments annually.
While these special payment designations are available for hospitals covered by traditional Medicare, Medicare Advantage (MA) accounts for a rising share of discharges across the country and is growing more rapidly in nonmetropolitan areas, which may pose additional challenges for rural hospitals. Many rural hospitals report that MA plans reimburse them even less than Traditional Medicare, and they face mounting financial pressures that jeopardize their ability to provide essential services.
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Federally Qualified Health Centers (FQHCs) receive reimbursement from Medicare under a Prospective Payment System
Federally Qualified Health Centers (FQHCs) are HRSA Health Center Program award recipients and look-alikes that are certified by the Centers for Medicare & Medicaid Services (CMS). They are important safety net providers for rural communities.
FQHCs can receive reimbursement from Medicare under a Prospective Payment System (PPS). This system calculates Medicare payment based on a national rate that is adjusted for the location where services are furnished. The rate is increased by 34.16% when a patient is new to the FQHC, or an Initial Preventive Physical Exam (IPPE) or Annual Wellness Visit (AWV) is furnished.
Medicaid agencies also often reimburse FQHCs under the Prospective Payment System (PPS) or another state-approved Alternative Payment Methodology (APM). To receive Medicaid reimbursement, each FQHC site must separately enroll for FQHC certification and Medicare FQHC reimbursement.
In addition to FQHCs, there are other special payment designations under Medicare and Medicaid that are designed to support hospitals serving rural communities. For example, the Disproportionate Share Hospital (DSH) designation supports hospitals that provide care to a disproportionate number of low-income patients. The Medicare-Dependent Hospital (MDH) designation provides enhanced payments to support small rural hospitals with 100 or fewer beds, where Medicare patients make up at least 60% of inpatient days or discharges.
However, despite these special designations, rural hospitals continue to face financial challenges. The expansion of Medicare Advantage (MA) plans has resulted in reimbursement rates that are even lower than those of traditional Medicare, which is already recognized as paying below the cost of care. These low reimbursement rates, along with payment delays and denials, have contributed to the closure of many rural hospitals and obstetrics units.
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Medicare-Dependent Hospitals (MDHs) are small rural hospitals with high Medicare inpatient shares
Traditional Medicare includes special payment designations targeted toward rural hospitals that can increase payments through inpatient and outpatient prospective payment systems (IPPS). These designations are not permanent but have been renewed over time. The Medicare-dependent designation is one such designation.
The MDH program was established by Congress in 1987 to support small rural hospitals with a significant percentage of Medicare patients. The program was extended in March 2025 through a continuing resolution passed by Congress. However, without further action from Congress, the MDH program will expire on March 31, 2025.
While the MDH designation has provided support to small rural hospitals, rural hospitals continue to face financial challenges. The rapid expansion of Medicare Advantage (MA) plans and the reimbursement rates below the cost of care have exacerbated these challenges. Delayed or denied payments and increased administrative burdens have further strained the financial stability of rural hospitals, threatening access to care for the millions of Americans who depend on them.
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Frequently asked questions
Medicare reimbursement refers to the payment that hospitals receive from Medicare, the federal health insurance program, for providing healthcare services to patients covered by the program.
Traditional Medicare includes special payment designations targeted towards rural hospitals that can increase payments through inpatient and outpatient prospective payment systems (IPPS), reimbursing hospitals based on their costs, or providing monthly facility payments. Critical Access Hospitals (CAHs), which are rural hospitals with a maximum of 25 beds located at a minimum distance from other hospitals, receive 101% of inpatient and outpatient costs from Medicare.
Medicare Advantage (MA) plans have been reported to reimburse rural hospitals at lower rates than Traditional Medicare. MA plans are said to reimburse only 90.6% of Traditional Medicare rates, and they do not provide monthly facility payments. These lower reimbursement rates, along with payment delays and denials, pose significant financial challenges for rural hospitals.
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