A growing number of urban hospitals are reclassifying themselves as both urban and rural to reap financial benefits Congress intended for rural hospitals only, a new study has found.
“In 2016, in response to two federal court decisions, the Centers for Medicare and Medicaid Services began allowing geographically urban hospitals to be dually classified as urban and rural simultaneously,” states the study published in Health Affairs. “This dual classification enables hospitals to use urban wage indexes for calculating Medicare reimbursements, while also benefiting from Medicare policies solely intended to support rural health.”
The study said cases of dual classification rose from three in 2017 to 425 in 2023. More than 75 percent were nonprofit institutions in large metropolitan areas, including many large academic centers. Prevalence varied by state.
Congress Notices
It did not take long for the results of the study, “Sharp Rise in Urban Hospitals with Rural Status in Medicare, 2017-2023,” to reach Capitol Hill.
“The dual classification scheme imposes damaging costs on American taxpayers as well as our rural communities who are at risk of seeing critical resources like affordable doctors and medicines being funneled away to feed the bottom line of urban hospitals,” said Rep. Jason Smith (R-MO), chairman of the House Ways and Means Committee, in an Aug. 19 statement.
“As the committee with jurisdiction over Medicare hospital payments, we must restore integrity, common sense, and balance to the system,” said Smith.
Rural Hospital Closures
The findings come at a time when the Centers for Medicare and Medicaid Services (CMS) reports Medicare spending grew 8.1 percent to $1,029.8 billion in 2023, or 21 percent of all health care spending, and 193 rural hospitals closed over the past 20 years.
“Truly rural hospitals continue to struggle, while large urban academic medical centers see record profits,” states a House Ways and Means Committee news release. “According to data from the Sheps Center for Health Services Research, 112 rural hospitals have completely closed in the past 20 years. At the same time, the top 20 hospitals abusing the dual classification process, many of them nonprofits and large, academic medical centers, are exceeding a combined $80 million in net patient revenue in one year alone.”
The Health Affairs study lists some of the benefits urban hospitals can reap while using dual classification, such as certain Medicare benefits intended for rural hospitals and “potential eligibility for sole community hospital, rural referral center, and Medicare-dependent small rural hospital status; lower eligibility standards for participation in the 340B Drug Discount Program; and increased graduate medical education slots.”
Drug Discounts
The dual-classification arrangement has led to misuse of the federal 340B Drug Discount Program, which requires drug makers to sell drugs at reduced prices to struggling hospitals, often those in rural areas, the study says.
“Concerningly, dual classified hospitals now have easier participation in the 340B program through needing to meet the rural disproportionate share hospital adjustment percentage of 8 percent compared with an 11.75 percent threshold for urban hospitals, effectively meaning that these hospitals can serve a lower number of low-income patients to qualify,” the study states.
The use of the 340B program by urban hospitals due to the dual classification arrangement has brought renewed attention to the troubled drug program for low-income people, states an August 6 analysis by the Commonwealth Fund.
“[S]ome believe the 340B program’s growth has contributed to consolidation in the health care industry, with more and more hospitals acquiring provider practices and specialty pharmacies,” states the analysis. “The program has also been criticized for worsening generic drug shortages and for incentivizing hospitals to shift care from underserved areas to wealthier communities in a bid to raise revenue.”
Double Injury
Dual classification hides the true magnitude of rural hospitals’ struggles, says Merrill Mathews, Ph.D., a columnist on health care and other issues for The Hill.
“According to a Kaiser Family Foundation report, 193 rural hospitals closed between 2005 and 2024, raising concerns about access to care for millions of rural Americans,” said Mathews. “When urban hospitals seek dual classification, as both urban and rural, it can skew the perception, making it appear that rural-hospital decline is not as severe as it is, which can affect how policymakers respond.”
Use of workarounds to take advantage of government programs is widespread, says Matthews.
“Many hospital systems have become masters at how to maximize revenue by gaming Medicare’s and Medicaid’s system of regulations and price controls,” said Matthews.
Bonner Russell Cohen, Ph.D., ([email protected]) is a senior policy analyst with the Committee for a Constructive Tomorrow.
Bonner R. Cohen is a senior fellow with the National Center for Public Policy Research, a position he has held since 2002.
