Urban hospitals claim rural status, sparking worry over $50B fund

Modern Healthcare – Monday, August 4, 2025
By Alex Kacik

Hospitals in urban areas are increasingly using a regulatory loophole to benefit from policies designed to support rural providers, according to a new study.

The number of urban hospitals that also classify as rural facilities has grown exponentially since 2017, potentially limiting the impact of federally and taxpayer-funded programs that aim to bolster the rural health safety net, according to a study published Monday in Health Affairs. Metro-area hospitals may try to use their dual classification to access the $50 billion Rural Health Transformation Fund created under the new tax law, as well as graduate medical education slots and 340B discounts, industry observers said.

“The $50 billion fund was supposed to be the savior of rural hospitals facing huge Medicaid cuts,” said Benjamin Anderson, president and CEO of Hutchinson Regional Healthcare System in central Kansas. “If the funding goes to hospitals that aren’t actually rural, that would further put rural hospitals at risk.”

The rural fund, which hospitals can start applying to in September, was included in the “One Big Beautiful Bill” to try to dull federal funding cuts and a potential spike in the uninsured population. The program is one of several that could be impacted by hospitals with both urban and rural classifications. The number of dually classified hospitals increased from three in 2017 to 425 in 2023, according to the study.

Federal appellate courts in 2015 and 2016 found the Centers for Medicare and Medicaid Services’ ban on dual classification unlawful, leading to a rule that went into effect in 2017 allowing geographically urban hospitals to be dually classified as urban and rural facilities. Urban hospitals have typically gained rural classification through the rural referral center designation, researchers said.

Rural referral centers must either have at least 275 beds, or have half of their Medicare referrals come from other hospitals; at least 60% of Medicare beneficiaries live at least 25 miles away; and at least 60% of all treatment for Medicare beneficiaries be provided to patients who live at least 25 miles away. Hospitals can also qualify if they have high patient acuity and discharge levels while meeting one of the following criteria: Half of their clinicians are specialists; at least 60% of discharges are for hospital patients who live at least 25 miles away; or at least 40% of all hospital patients are referred from other providers.

Rural referral centers have a lower bar to clear compared to traditional hospitals seeking 340B drug discount eligibility. Those facilities only need to meet an 8% disproportionate share adjustment percentage threshold versus 11.75%, essentially requiring less care for low-income individuals before drug discounts are available.

Critics of the 340B program, which offers an estimated 25% to 50% discount on outpatient drugs for hospitals that serve low-income patients, have said it has grown too large, helping large, non-safety-net hospitals. The increase in academic medical centers based in urban areas that benefit from a lower disproportionate share adjustment percentage threshold may fuel those arguments.

Rural hospitals also receive 30% more graduate medical education slots than their urban counterparts. Those openings are highly sought after, since most hospitals train more physician residents than Medicare funds. Those with few slots have to bear training costs themselves or deal with fewer physicians in their workforce.

Congress should direct federal funding to hospitals in rural communities, where it is most needed, said Ge Bai, accounting and health policy professor at Johns Hopkins University and co-author of the study.

“Rural hospital money should go to providers in rural areas,” she said.

One solution could be to base dually classified hospitals’ eligibility for rural programs on rural-urban commuting area codes, which measure population density, Hutchinson Regional’s Anderson said.

The American Hospital Association, National Rural Hospital Association, America’s Essential Hospitals and Association of American Medical Colleges declined to comment.

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