Are Rural Hospital Designations the New Strategy for Big Health Systems?
Large health systems are increasingly securing rural hospital designations, even for facilities located in urban areas. What’s behind the trend, and what are the implications?
What’s Going On
A recent Health Affairs study shows that urban hospitals are increasingly obtaining dual classification as both urban and rural under Medicare. Just three hospitals had this status in 2017. By 2023, that number had jumped to 425. The designation unlocks access to rural-specific Medicare benefits and funding streams.
Why the Shift?
1. Financial Advantages
Rural designation opens the door to:
Higher Medicare reimbursements (via Sole Community Hospital or Rural Referral Center status)
Access to the 340B drug discount program
More federally funded slots for Graduate Medical Education
These incentives are a lifeline for struggling facilities—but they’re now attracting interest from larger, better-resourced systems too.
2. Rural Hospitals Are in Trouble
Over 700 rural hospitals are currently at risk of closure. Many lose money on most services and operate on razor-thin margins, mainly due to low reimbursement from private payers. More than 100 have already shut down in the last decade. In response, large health systems are stepping in—sometimes acquiring these facilities, sometimes reclassifying their own—to access the benefits tied to rural status.
What It Means
This trend exposes cracks in the system. Urban hospitals with solid infrastructure are navigating policy loopholes to gain rural perks, while genuinely rural hospitals—often the only source of care in their communities—are on the verge of collapse.
The Bottom Line
Rural hospital status was meant to protect access to care in underserved areas, not serve as a strategic tool for big systems. Unless policymakers tighten the rules and prioritize actual rural needs, the original purpose of these programs will be lost, and vulnerable communities will pay the price.