Your browser doesn't support JavaScript. Please upgrade to a modern browser or enable JavaScript in your existing browser.
Skip Navigation U.S. Department of Health and Human Services
Agency for Healthcare Research Quality
Archive print banner

This information is for reference purposes only. It was current when produced and may now be outdated. Archive material is no longer maintained, and some links may not work. Persons with disabilities having difficulty accessing this information should contact us at: Let us know the nature of the problem, the Web address of what you want, and your contact information.

Please go to for current information.

Rural Health Care: Challenges & Opportunities



Ira S. Moscovice, Ph.D., Professor, School of Public Health, University of Minnesota, Minneapolis, MN.

Paul D. Moore, R.Ph., Chief Executive Officer (CEO), Atoka County Health Care Authority, Atoka, OK.

Dr. Moscovice began with a historical perspective on the evolution of rural hospitals over the last 13 years. Between 1987 and 1996, rural hospitals changed in three significant ways:

  • They became more organizationally complex (networks and alliances, diversification).
  • They expanded their outpatient role and diversified, e.g., home health.
  • They became increasingly reliant on payers who demand discounts (greater reliance on Medicaid and Medicare).

Due in part to their small size, rural hospitals are extremely sensitive to public policy. Whether at the State or Federal level, public policies have a tremendous impact on smaller facilities; they cannot adapt or respond as quickly as large urban facilities to changes. Rural hospitals do not have the patient base over which to spread losses; as a result, the smaller volume and bed-size facilities are especially vulnerable to changes.

Rural hospitals during the past decade have been increasingly paid as sole community providers, that is, if a hospital is the only inpatient facility within a 35-mile radius, the Federal Government will reimburse that hospital on a cost basis, which can be financially beneficial to the facility.

The goal of the Balanced Budget Act of 1997 (BBA) was to decrease Medicare and Medicaid spending by $128 billion over 5 years in both urban and rural communities. Mechanisms to achieve these goals included expanding enrollments in managed care plans and reducing fee-for-service payments and programs.

Dr. Moscovice highlighted the following favorable provisions of the BBA that affect rural hospitals:

  • Reauthorization of the Medicare Dependent Rural Hospital Program (through 10/2001).
  • Creation of the Medicare Rural Hospital Flexibility Program, which allows the creation of critical access hospitals (CAHs).

He noted the following unfavorable provisions of the BBA that affect rural hospitals:

  • Limits on inpatient prospective payment annual updates.
  • Bundling of postacute discharges (affects payment for transfer patients).
  • Prospective payment for hospital outpatient services, skilled nursing facilities (SNFs), and home health agencies.
  • Elimination of cost-based payment to Rural Health Clinics (RHC) and federally qualified health centers (FQHCs) for care provided to Medicaid patients.

Many rural hospitals have entered the managed care business. Dr. Moscovice explained that managed care in rural areas is increasing slowly but steadily, particularly serving the commercial (mainly preferred provider organizations) and Medicaid markets, and less so regarding Medicare. The proportion of rural hospitals with managed care contracts has increased dramatically over the past decade.

The Medicare Rural Hospital Flexibility Program (MRHFP) is a prime example of a national policy designed to accommodate State and local variation. The program provides regulatory relief and a cost-based payment option for smaller, low-volume facilities that lack the resources needed to meet hospital staffing and other requirements under Medicare.

As part of the BBA, States that wish to participate in the program must develop their own criteria for designating CAHs in consultation with their State hospital associations. The U.S. Department of Health and Human Services also provides grant funds to States for the purposes of planning and implementing the program with an emphasis on integrating emergency medical services, primary care services, and acute care services at the local and regional levels.

Requirements for a CAH include:

  • Maximum of 15 acute care beds.
  • Flexible staffing to include available 24-hour emergency and nursing services.
  • Acute inpatient care for up to 96 hours.
  • Flexibility in using nonphysician personnel, such as physician assistants and nurse practitioners under the supervision of a physician who may be off-site.
  • Thirty-five mile drive from another hospital or certified by the State as being a necessary provider.

Dr. Moscovice believes that the MRHFP should not just be thought of as extra reimbursement for small rural facilities but rather an opportunity to develop networks and create linkages. Currently about 10 percent of small rural hospitals have been or are in the process of being designated as CAHs. This number is expected to grow to approximately 25 percent in the next 3 to 5 years, representing a significant change for many small facilities.

Paul Moore offered an operational perspective as an administrator of a small facility in Atoka County, Oklahoma, that converted to a CAH in 1999. Coming from a rural area that includes 15 percent elderly and 21 percent Medicaid population, Mr. Moore stated that his hospital consistently lost money during the mid-1990s and that deciding to convert to a CAH was a matter of survival.

Upon initial examination of the qualifications of the MRHFP, Mr. Moore realized Atoka Memorial Hospital already met many of the qualifications such as bed size and other requirements of the State's Rural Hospital Flexibility Program. A financial feasibility study revealed that it would be more advantageous to be paid on a cost basis rather than by diagnosis-related groups. Utilization trends illustrated that more than 80 percent of the hospital's patients were Medicare beneficiaries. Perceptions of the medical staff, employees, board of trustees, and community were also considered.

Factors to consider for CAH conversion include the potential for:

  • Financial feasibility of cost-based reimbursement.
  • Staffing flexibility.
  • Physician recruitment and retention.
  • Networking with neighboring providers.
  • Aligning services that are consistent with community needs.

There is sometimes a misconception that a rural hospital should be a smaller version of a large urban hospital. Mr. Moore emphasized that it is important to realize that each community is different and has its own set of circumstances.

To answer the question "Why did they do it?", Mr. Moore responded with four primary reasons:

  • Economic survival.
  • Positive impact on the community (in terms of both delivery of care and economic impact).
  • Maintenance of crucial services.
  • Loyalty to members of the community.

Mr. Moore shared what he learned in formulating the decision to convert Atoka Memorial to a CAH. As the first CAH in all of Oklahoma, he learned a great deal about the process of conversion along with officials in State government and the regional office of the Health Care Financing Administration. He also learned a lot about the importance of case management. Improved knowledge of networking and diversification of products and meeting a need in another community were also valuable experiences. And he learned about the value of cost-based reimbursement as a CAH.

Mr. Moore's philosophy is that "rural is not second rate." His hospital's mission is to provide access to quality health care that is appropriate to the community's needs and to prove there is value in doing so.

According to both Dr. Moscovice and Mr. Moore, rural hospitals cannot secure their financial good health alone. Public policymakers must partner with rural hospitals to ensure local access to health care services.


Medicare Rural Hospital Flexibility Program Status Chart. Rural Research Program, University of North Carolina at Chapel Hill.

Moscovice I, Wellever A, Stensland J. Rural hospitals accomplishments and present challenges. University of Minnesota Rural Health Research Center. July 1999.

Ricketts TC, editor. Rural health in the United States. New York: Oxford University Press; 1999.

Previous Section Previous Section         Contents         Next Section Next Section

The information on this page is archived and provided for reference purposes only.

AHRQ Advancing Excellence in Health Care