Urban Hospitals Exploit Medicare Dual Classification to Access Rural Benefits

A recent Health Affairs study reveals a growing trend among U.S. urban hospitals, predominantly nonprofit and academic medical centers, exploiting Medicare's classification to be recognized simultaneously as "urban" and "rural." This dual classification permits these hospitals to access financial benefits designed for rural facilities, such as higher Medicare wage index payments, increased Graduate Medical Education (GME) slots, and eligibility for the 340B drug pricing program. From only three hospitals classified as administratively rural in 2017, the count surged to 425 by 2023, highlighting widespread adaptation of this practice, with significant variation across states.

This classification approach has economic implications for Medicare's budget and rural healthcare access. By drawing disproportionate funding and program benefits, these urban hospitals divert resources intended for rural hospitals, which continue to face financial challenges amid closures—112 rural hospitals have shut down over the past two decades. The increased revenue for abuser hospitals exceeds $80 million annually across the top 20 institutions employing this dual status.

Medicare's intended support for rural hospitals addresses the unique difficulties in staffing, infrastructure, and service delivery faced by facilities in less populous areas. The dual classification undermines these objectives by allowing urban hospitals, often larger and financially robust, to benefit from programs designed for rural communities without corresponding community need.

Legislative and regulatory interest is mounting, with oversight bodies such as the House Ways and Means Committee emphasizing the need to correct these classification practices. Efforts aim to restore balance and integrity to Medicare reimbursement policies to ensure equitable distribution of federal funds and protect rural healthcare viability.

This evolving issue underscores broader challenges in Medicare policy administration, particularly in aligning program incentives with the intended target populations. It raises considerations for policymakers on refining definitions, auditing mechanisms, and compliance standards to prevent exploitation of rural designations by urban healthcare providers.