A regulatory loophole has allowed hundreds of large, urban hospitals to claim rural benefits, raising alarms from lawmakers and experts who warn that taxpayer dollars are being diverted from the very communities Congress intended to protect.

In 2016, CMS revised its regulations in response to two federal court decisions: Geisinger Community Medical Center v. Secretary and Lawrence and Memorial Hospital v. Burwell. The rule change effectively permitted hospitals to use a two-step reclassification process to be designated as both urban and rural for Medicare purposes, a practice CMS had previously prohibited.

The impact was immediate.

According to a study published in Health Affairs in August, the number of urban hospitals claiming rural status jumped from just three in 2017 to 425 in 2023. The number of hospital beds in dual-classified facilities skyrocketed from fewer than 400 in 2017 to more than 162,000 in 2023, representing 61% of all beds in administratively rural hospitals nationwide.

More than 75% were nonprofit organizations, and all of the top 20 highest-revenue facilities with dual status were teaching hospitals, with net patient revenues ranging from $2.9 billion to more than $9 billion. New York City-based NewYork-Presbyterian Hospital, with 2,850 beds and nearly $9.3 billion in patient revenue, topped the list.

Rural dollars, urban pockets

Dual classification gives hospitals access to both urban and rural benefits, a powerful combination. Hospitals can use the higher urban wage index for Medicare payments, while also tapping into rural-specific benefits such as sole community hospital status, rural referral center designation, additional Graduate Medical Education slots and easier entry into the 340B drug discount program.

The 340B rules are particularly striking. Urban hospitals with rural status need only an 8% disproportionate share hospital adjustment percentage to qualify, compared with 11.75% for strictly urban hospitals, according to the study. In practice, this means large metropolitan teaching hospitals can serve fewer low-income patients and still receive drug discounts originally intended for rural facilities.

“Dually classified hospitals now have easier participation in the 340B program,” the Health Affairs study noted, “effectively meaning that these hospitals can serve a lower number of low-income patients to qualify.”

Yang Wang, PhD, assistant research professor at Johns Hopkins Bloomberg School of Public Health and leader of the study, said large, urban hospitals are increasingly taking advantage of this regulatory mechanism to derive rural benefits.

“It raises important policy questions regarding fairness and effective targeting of federal resources that are limited and meant to support truly rural hospitals, many of which are struggling to stay open,” Dr. Yang said in an Aug. 1 news release.

Where dual-classified hospitals are clustered

The Johns Hopkins study also revealed striking geographic disparities in how dual classifications are distributed across the country.

States such as Connecticut, Massachusetts and California reported some of the highest percentages of urban hospitals reclassified as rural. In contrast, other states — including Alaska, Montana and Wyoming — did not have a single dual-classified hospital.

Researchers said this uneven distribution highlights how local regulatory environments and hospital strategies shape the practice, and it raises further questions about whether rural dollars are reaching the regions most in need.

Lawmakers sound the alarm

House Ways and Means Committee Chair Jason Smith, R-Mo., said the findings reveal a system ripe for abuse.

“Recent evidence shows an alarming trend among mostly nonprofit urban hospitals that are exploiting federal healthcare programs by posing as rural facilities to take advantage of flexibilities within Medicare intended for facilities located in truly rural areas,” Mr. Smith said in an Aug. 19 news release. “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.”

Baltimore-based Johns Hopkins researchers emphasized the same concern.

“This is a striking example of unintended policy consequences,” Ge Bai, PhD, professor at both the Bloomberg School and Johns Hopkins Carey Business School, said. “Congress enacted these programs to expand care in underserved rural areas, but they end up diverting billions of taxpayer dollars away from those communities to support large urban hospitals.”

The stakes are high in a healthcare landscape that is becoming increasingly difficult for rural hospitals to stay afloat.

Over the past 20 years, 112 rural hospitals have shuttered, according to the Sheps Center for Health Services Research. In contrast, the top 20 hospitals leveraging dual classification — many of them large nonprofit academic medical centers — reported more than $80 million in combined net patient revenue in a single year, according to the committee.

The pie keeps shrinking

For truly rural hospitals, the consequences of this financial diversion are already visible.

“Urban hospitals in urban settings may serve some rural patients, but they don’t have to prove they serve a substantial number. They’re not truly rural hospitals, but they’re administratively considered rural under the dual classification because they provide care for rural-located patients.” Marquita Lyons-Smith, DNP, director of the health administration program at North Carolina Central University in Durham, told Becker’s. “That means they can claim rural status without being truly accountable to rural populations.”

Jillian Torres, PhD, clinical assistant professor in the department of health policy and management at New Orleans-based Tulane University, said the trend is squeezing already thin rural budgets.

“As more urban hospitals gain rural designation, the pie of rural-specific resources is being sliced into smaller pieces,” Dr. Torres told Becker’s. “There are more pieces, but the pie itself — the actual bulk of federal funding designated for rural facilities — hasn’t grown in that time period. So, those truly rural hospitals are trying to compete for essentially fewer funds as these larger competitors eat up more.”

Dr. Torres cited recent research showing that 61% of hospital beds in “administratively rural” hospitals are now located in urban areas. “That’s billions of dollars intended for rural hospitals being redirected to large urban academic centers such as NewYork-Presbyterian,” she said.

These shifts could tip more rural hospitals into closure. “For rural hospitals that are largely independent and already on thin margins, even small reductions in available funds could push them over the edge,” Dr. Torres said.

The economic toll of closures

Rural hospital closures create both healthcare and economic crises. Yet under Medicare’s dual classification policy, urban hospitals can claim “rural” status — and its reimbursement benefits — without truly serving rural populations.

“This dynamic undermines the stability of the local economy and adversely impacts health outcomes for patients lacking timely and sustained access to quality care,” Dr. Lyons-Smith said. “The result is a compounding downward trajectory with both economic and clinical consequences.”

Dr. Torres emphasized that rural hospitals often serve as anchor institutions.

“When a rural facility closes, it’s not just shuttering clinical services,” she said. “It means the loss of local jobs, the loss of a major employer and the loss of an institution that anchors the community’s economy.”

Those effects ripple for decades.

“We always talk about the wage gap or the wealth gap, but what about the health gap?” Dr. Torres said. “Hospital closures don’t just increase travel times for patients; they widen disparities in chronic disease management, primary care access and long-term health outcomes across generations.”

Searching for solutions

Both experts stressed the need for reform.

Dr. Torres recommended a tiered eligibility system that distinguishes between isolated rural hospitals, micropolitan or suburban hospitals, and large urban hospitals with rural status. Benefits could then be weighted based on community need, such as provider shortages, travel times to tertiary centers or imminent closure risk.

She also called for impact assessments in which urban hospitals seeking rural status should have to evaluate whether their designation would harm neighboring rural facilities. “That kind of accountability could help ensure federal benefits are flowing where they’re needed most,” she said.

Dr. Lyons-Smith underscored the role of academic collaborations in responsibly extending support to rural communities. She cited North Carolina Central University’s Rural Health Hub and mobile health clinics, along with Duke University’s mobile prevention and care teams, which integrate nursing students and faculty into rural practice settings. These initiatives not only help bridge critical service gaps but also contribute to developing sustainable, long-term health workforce pipelines.

However, she cautioned that these efforts are not a substitute for stronger procedural protections. “Without more robust safeguards, we will continue to see closures like that of Martin General Hospital in North Carolina,” she said. “Increasing reimbursement for genuinely rural hospitals benefits entire communities; failing to do so risks precipitating a significant public health and economic crisis.”

The road ahead

Experts agree that the dual classification scheme reflects a difficult balancing act: hospitals of all sizes are under financial strain, yet rural facilities face a unique and acute threat of closure.

As Dr. Torres put it, “We always talk about the wage gap or the wealth gap. But what about the health gap? Without reform, rural patients will be left behind — not just today, but for generations.”

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