WASHINGTON, D.C.– A concerningly large number of hospitals – mostly nonprofits – located in urban cities are exploiting a Medicare definition that allows them to be considered both “urban” and “rural” simultaneously, letting them draw down generous benefits and reimbursement models specifically intended for rural communities, according to a recent study in Health Affairs. Using this so-called dual classification scheme, hundreds of sophisticated urban hospitals have gamed Medicare’s wage index to get the financial benefits of being urban facilities, while, at the same time, posing as “rural” to receive the significant benefits Congress intended for truly rural hospitals. This includes an increase of up to 30 percent more Medicare-funded Graduate Medical Education (GME) slots and the ability to care for fewer low-income patients to qualify for heavily discounted outpatient drugs under the 340B program without any benefit to rural communities.
As evidence of the explosion in urban nonprofit hospitals classifying as rural, the study reports “a substantial increase in administratively rural hospitals in the US, driven by the dual classification of existing hospitals located in urban areas, which rose from 3 in 2017 to 425 in 2023, with prevalence varying by state. More than three-quarters of dually classified hospitals were nonprofit, including many large academic medical centers in metropolitan areas.”
Ways and Means Committee Chairman Jason Smith (MO-08) issued the following statement in response to the substantial growth in urban hospitals classifying as rural:
“Recent evidence shows an alarming trend among mostly nonprofit urban hospitals that are exploiting federal health care programs by posing as rural facilities to take advantage of flexibilities within Medicare intended for facilities located in truly rural areas. 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 pad the bottom lines of urban hospitals. As the committee with jurisdiction over Medicare hospital payments, we must restore integrity, commonsense, and balance to the system.”
Truly rural hospitals continue to struggle while large, urban academic medical centers see record profits. According to data from the Sheps Center for Health Services Research, 112 rural hospitals have completely closed in the last 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.
Key Highlights of Health Affairs Study:
- The proliferation of dual classifications began after the Centers for Medicare & Medicaid Services (CMS) was forced to revise its regulations – which were originally and specifically meant to avoid this practice – in response to court rulings.
- “In 1999, Congress granted geographically urban hospitals the option to self-classify as administratively rural under Section 1886(d)(8)(E) of the Social Security Amendments of 1965. Through rulemaking, CMS prohibited hospitals that took this option from simultaneously benefiting from administratively rural policies and using another pathway—the Medicare Geographic Classification Review Board—to reclassify them back to their original urban designation for the purposes of urban wage indexes…However, in April 2016, CMS revised its regulations to allow geographically urban hospitals to be dually classified as urban and rural simultaneously, regardless of geographic location…This rule change stemmed from two federal appellate court decisions: Geisinger Community Medical Center v. Secretary (2015) and Lawrence + Memorial Hospital v. Burwell (2016).”
- “In 1999, Congress granted geographically urban hospitals the option to self-classify as administratively rural under Section 1886(d)(8)(E) of the Social Security Amendments of 1965. Through rulemaking, CMS prohibited hospitals that took this option from simultaneously benefiting from administratively rural policies and using another pathway—the Medicare Geographic Classification Review Board—to reclassify them back to their original urban designation for the purposes of urban wage indexes…However, in April 2016, CMS revised its regulations to allow geographically urban hospitals to be dually classified as urban and rural simultaneously, regardless of geographic location…This rule change stemmed from two federal appellate court decisions: Geisinger Community Medical Center v. Secretary (2015) and Lawrence + Memorial Hospital v. Burwell (2016).”
- Sophisticated urban hospitals are using the complex dual classification scheme to make themselves eligible for rural-specific financial benefits, despite those hospitals being otherwise ineligible for such benefits.
- “Dual classification allows geographically urban hospitals to receive Medicare benefits designated for rural hospitals, for which they would otherwise generally not be eligible (including 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), and benefits intended for urban hospitals (such as an urban wage index and other Medicare payments).”
- “Concerningly, dually 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.”
- Failure to address dual classification has led to higher costs for Medicare and a diversion of resources from rural communities, and as more urban hospitals dually classify, those negative effects will only worsen.
- “A rapid rise in administratively rural hospitals, largely driven by the dual classification of hospitals located in urban areas, can potentially divert federal resources from geographically rural hospitals. To preserve the integrity and effectiveness of rural health policy, Congress should direct federal support to geographically rural hospitals, where it is most needed.”
Read the study here.