Rural Medicare

Rural Americans are older, sicker, and more Medicare-dependent than their urban counterparts. Rural counties have MA penetration rates as low as 20 percent in some markets. From 2005 through 2024, 193 rural hospitals closed, 71 of them Critical Access Hospitals. The February 2025 Chartis Group report identified 432 financially vulnerable rural hospitals at risk of closing. In over a third of states, the median operating margin for rural hospitals is negative.

The rural Medicare problem is not one problem but several interlocking failures: a hospital payment system that cannot sustain low-volume facilities, a physician fee schedule that undervalues rural practice, an MA benchmark methodology that makes plan participation financially unviable in low-spending markets, and a ground ambulance payment structure that fails to account for rural cost differentials. The One Big Beautiful Bill Act’s $50 billion Rural Health Transformation Program represents the largest federal investment in rural health since the Medicare Modernization Act of 2003. Whether it will be sufficient depends on how states deploy the funding and whether the structural problems that created the rural health crisis are addressed or merely papered over.

The Rural Medicare Landscape

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Approximately 57 million Americans live in rural areas. They are disproportionately elderly: rural counties have higher shares of Medicare beneficiaries than urban areas. They are disproportionately lower-income: rural areas have higher rates of poverty and fewer employer-sponsored insurance options. And they are disproportionately dependent on Medicare as a payer: when rural hospitals lose Medicare volume, they often have no commercial payer base to offset the loss.

The rural health infrastructure has contracted steadily. Between January 2010 and October 2025, 152 rural hospitals closed or stopped providing inpatient services. The closure rate was relatively stable for years, but pandemic relief funds that masked underlying financial distress have expired. There was an uptick in complete rural hospital closures from three in 2022 to five in 2023 and four in 2024, with closures concentrated in states that have not expanded Medicaid.

Service line contraction has been as consequential as full closure. The share of rural hospitals offering obstetrics care dropped from 57 percent in 2010 to 48 percent in 2022. Rural residents seeking maternity care, trauma care, or specialty services increasingly must travel to distant facilities. The geographic distance creates access barriers that affect health outcomes.

For providers operating in rural markets, the financial reality is stark. Operating margins were lower among hospitals in rural areas (3.1 percent) than hospitals in urban areas (5.4 percent) in 2023. Operating margins were worse (1.7 percent) among the nearly 1,000 hospitals in rural areas that are neither connected to nor part of any larger health system.

Critical Access Hospital Economics

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The Critical Access Hospital program was created to preserve access to hospital services in rural communities that could not sustain standard acute care hospitals. To qualify, a hospital must have fewer than 25 acute inpatient beds, be located more than 35 miles from the nearest hospital (15 miles in areas with mountainous or secondary roads), maintain an average length of stay under 96 hours, and operate 24-hour emergency care.

The payment model is cost-based reimbursement: Medicare pays CAHs 101 percent of reasonable costs rather than the prospective payment rates that apply to other hospitals. The theory is that cost-based payment protects low-volume facilities from the financial losses that would result from spreading fixed costs across too few patients.

As of October 2024, there were 1,369 CAHs across the country in all but five states. Despite the favorable payment methodology, CAH designation has not prevented closures. Since 2005, 71 CAHs have closed completely. The cost-based model cannot overcome the fundamental challenge of operating a 24-hour emergency department, maintaining on-call coverage, and staffing a facility when patient volume is insufficient to support the infrastructure.

The Rural Emergency Hospital designation, created by the Consolidated Appropriations Act of 2021 and effective January 1, 2023, offers an alternative for facilities that cannot sustain inpatient services. REHs operate 24-hour emergency departments and provide outpatient services but do not provide inpatient care. They receive 105 percent of standard outpatient prospective payment system rates plus a monthly facility payment of $285,625.90 in 2025.

Uptake has been modest. As of early 2025, approximately 40 to 42 hospitals have converted to REH status: 19 in 2023, 18 in 2024, and three so far in 2025. Nearly half of converting hospitals were previously operated by local governments. The REH model preserves emergency access for communities that would otherwise face complete closure, but the loss of inpatient beds and the exclusion from the 340B drug pricing program have limited appeal for some facilities.

The interaction between CAH economics and AHEAD global budgets creates complexity for rural hospitals in participating states. AHEAD’s hospital global budget accountability conflicts with cost-based reimbursement methodology. CMS added a payment floor provision to protect rural hospitals, but the methodological tension remains. Whether AHEAD represents opportunity or threat for rural hospitals depends on implementation details that are still being resolved.

MA Exits in Rural Markets

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Medicare Advantage penetration varies dramatically by geography. Urban and suburban markets routinely see MA penetration above 50 percent. Some rural counties have penetration below 20 percent. The disparity reflects the economics of MA benchmark methodology.

County benchmarks are set based on fee-for-service per-capita spending. Rural counties with low FFS spending produce low benchmarks. Low benchmarks mean less funding for MA plans in markets where delivery costs are high on a per-capita basis because volume is low and fixed costs must be spread across fewer beneficiaries. The benchmark methodology creates a structural urban-rural equity problem: MA is least financially viable in the markets where beneficiaries have fewest options.

When MA plans exit rural markets, the consequences compound. Beneficiaries who had supplemental benefits through their MA plan lose those benefits. They must either enroll in another MA plan (if one exists), return to Original Medicare and purchase a Medigap policy, or go without supplemental coverage. Medigap access in rural markets is constrained by limited carrier presence, underwriting barriers for beneficiaries outside guaranteed issue periods, and premium variation. The Original Medicare default is not equivalent to the coverage that beneficiaries had under MA.

Plan exits and benefit reductions have accelerated as the CY2027 rate environment (0.09 percent growth) and V28 risk adjustment phase-in pressure MA economics. Rural markets, already marginal for many plans, are among the first to be abandoned when plans retrench.

The Ground Ambulance Crisis

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Ground ambulance services were excluded from the No Surprises Act’s balance billing protections. The exclusion reflected the complexity of ground ambulance delivery: roughly half of ground ambulance services are provided by fire departments or government entities rather than private companies, and the variation in ownership models, contractual arrangements, and cost structures made a federal solution difficult.

The Advisory Committee on Ground Ambulance and Patient Billing completed its work and submitted recommendations to Congress. The committee rejected the independent dispute resolution process used under the No Surprises Act in favor of a tiered payment standard that relies on state and local rate setting, with Medicare payment rates as a backstop. Congress has not enacted the recommendations.

Medicare’s ground ambulance payment methodology has long been criticized as inadequate for rural providers. Rural ambulances travel farther, make fewer trips, and cannot spread costs across call volume the way urban providers can. Temporary statutory add-on payments provide rural areas with a 3 percent increase and super-rural areas (the lowest 25 percent of rural population by density) with a 22.6 percent increase. These add-ons have been repeatedly extended but remain temporary. The Consolidated Appropriations Act of 2026 extended them through January 2027.

CMS collected operational and financial data from ground ambulance services through a congressionally mandated survey. The data has been transmitted to MedPAC, which will analyze it and issue recommendations by summer 2026. The analysis may finally provide the evidence base for permanent integration of add-on payments into base rates and data-driven updates to the fee schedule.

Twenty-one states have implemented rules to protect consumers from surprise balance billing for ground ambulance services, including six that enacted protections since mid-2024: Mississippi, Oklahoma, Washington, Indiana, New Hampshire, Oregon, and Utah. State action has filled part of the gap, but state laws cannot regulate ERISA-covered employer plans, leaving many privately insured consumers unprotected.

Geographic Benchmark Inequity

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The MA benchmark methodology creates systematic disadvantage for rural markets. Benchmarks are set as a percentage of local FFS per-capita spending. Counties with low FFS spending get low benchmarks. Counties with high FFS spending get high benchmarks.

The problem is that delivery costs do not track benchmark levels. A rural county may have low FFS spending because its population is relatively healthy or because access constraints suppress utilization. But operating costs for serving that population may be high because providers must maintain infrastructure for a dispersed, low-volume patient base. The MA plan receives a benchmark based on historical FFS spending while facing delivery costs that exceed what the benchmark supports.

The relationship between low benchmarks, benefit quality, and plan availability is direct. Plans in low-benchmark markets have less funding to offer supplemental benefits. Plans with weak benefit packages attract fewer enrollees. Markets with weak enrollment become unattractive for continued plan participation. Plans exit. Beneficiaries lose options.

This is why MA penetration maps show urban concentration and rural sparseness. The benchmark methodology was designed for a different era and a different purpose. It creates structural inequity that policy has not corrected.

OBBBA’s Rural Health Transformation Program

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The One Big Beautiful Bill Act, signed July 4, 2025, created the Rural Health Transformation Program with $50 billion in funding over five years. The allocation is $10 billion annually from 2026 through 2030, administered by CMS. On December 29, 2025, CMS announced that all 50 states received awards, with first-year allocations averaging $200 million and ranging from $147 million to $281 million.

The funding formula allocates 50 percent equally among approved states (approximately $100 million per state per year assuming all states participate) and 50 percent based on rural population metrics, the proportion of rural health facilities, and other factors the CMS Administrator deems appropriate.

States must submit Rural Health Transformation Plans specifying how they will improve access to hospitals and other healthcare providers for rural residents. Allowable uses include promoting evidence-based interventions for prevention and chronic disease management, providing payments to healthcare providers, promoting technology-driven solutions, providing training and technical assistance, and supporting value-based care models.

The funding is substantial but may not offset other OBBBA provisions. The Kaiser Family Foundation projects that rural areas will experience significant reductions in federal Medicaid funding under other provisions of the law. RHTP funding is projected to offset approximately 37 percent of the $137 billion reduction to rural federal Medicaid funding over a ten-year period. States may use RHTP funds for purposes other than direct provider payments, meaning rural hospitals cannot assume they will receive proportional benefit.

Whether RHTP strengthens the rural health infrastructure or merely slows its decline depends on state implementation. States that direct funding toward sustainable delivery system transformation may achieve lasting improvement. States that use funding for one-time payments without addressing structural problems will find themselves in the same position when funding expires.

Workforce, Telehealth, and the REH Designation

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The rural workforce pipeline is the binding constraint on rural health delivery. Physician fee schedule geographic adjustments, designed to reflect practice cost differences across markets, systematically disadvantage rural areas. Rural practices receive lower payments for the same services, making recruitment and retention more difficult.

J-1 visa waiver programs allow international medical graduates to remain in the United States by practicing in underserved areas. The programs help but do not solve the fundamental mismatch between where physicians want to practice and where they are needed. Graduate medical education slots concentrate in urban academic medical centers, and physicians trained in urban settings disproportionately remain in urban practice.

Telehealth offers promise for extending specialist access to rural populations without requiring specialists to relocate. Broadband availability remains a constraint: some rural areas lack the connectivity infrastructure to support video-based care. Audio-only telehealth flexibilities, extended repeatedly during and after the pandemic, remain important for populations that cannot access video visits. The permanence of telehealth flexibilities is still being debated, with continuing resolutions extending waivers incrementally rather than establishing permanent policy.

The REH designation represents one model for right-sizing rural delivery capacity. Facilities that cannot sustain inpatient services can preserve emergency and outpatient access. The 40-plus hospitals that have converted demonstrate that the model works for some communities. Chartis analysis suggests approximately 400 facilities are most likely to consider REH conversion, with 77 identified as prime candidates.

Legislative amendments could expand REH appeal. The Rural 340B Access Act, introduced in 2024, would allow REHs to participate in the 340B drug pricing program. Allowing swing beds would preserve some skilled nursing capacity. Congress has not enacted these amendments, but the RHTP funding environment may create momentum for strengthening the REH model.

Rural health networks represent an emerging strategy. The Ohio High Value Network formed among 25 rural hospitals in 2024, following similar networks in North Dakota (Rough Rider High-Value Network, 2023) and Minnesota (Headwaters High-Value Network, 2024). Collaboration on clinical and business initiatives allows small facilities to achieve scale effects without consolidation.

The rural Medicare problem is not going away. Demographic trends favor continued growth in rural Medicare dependence. The provider economics that drove closures and service line reductions remain challenging. RHTP provides resources, but resources without structural reform will produce temporary relief rather than sustainable transformation.

Related Reading

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MCR-03_06 Telehealth at the Crossroads: Permanence, Benefit Design, and the Rural Access Divide MCR-03_01 The One Big Beautiful Bill: What It Does to Medicare and Medicaid MCR-11_03 Colorado and Utah: Frontier Medicare in Conservative Policy Environments