Eleven Questions About Why Small-Town Hospitals Struggle and What Helps

That "Hospital" sign with the arrow on the edge of a small town was not put up for the tourists. It is there for the neighbors, the ones who were born in the building, got stitched up in it, or sat in its waiting room at three in the morning hoping for news. Take the sign down and a town does not just lose a building. It gets a little smaller, and a good deal more frightened.

This post is about policy, not medicine. It does not give medical advice, and nothing here should be read as a guide to your own care or your family's. Its subject is the business of keeping a hospital's doors open: how the money works, why it so often does not, and what lawmakers have tried. I have organized it as eleven questions, because those are the ones I hear most. The answers are plain, and where I have an opinion, I will say so.

The money problem

1. Why can't a small hospital just cut its costs and break even?

Because most of a hospital's costs do not shrink when the number of patients does. A hospital has to keep an emergency room staffed around the clock, because an emergency does not check the schedule. It needs nurses on every shift, a lab, imaging equipment, a pharmacy, heat, insurance and a building. Economists call those fixed costs: they are there whether the beds are full or empty.

A big-city hospital can spread those costs over tens of thousands of patients. A rural hospital might spread them over a few thousand. Cut the staff below a safe level and you no longer have a hospital. That is the basic problem: low volume, and costs that do not flex with it.

2. Who actually pays the bills?

The mix of who pays is called the payer mix, and in a rural area it leans heavily toward Medicare, which covers people 65 and older, and Medicaid, which covers low-income people. Rural communities tend to have older residents, which raises the Medicare share. Both programs pay set rates that are often below what private insurance pays, and some patients have no insurance at all, which leaves the hospital with unpaid bills. Fewer private-insurance patients means fewer of the better-paying ones to balance out the rest.

I do not say that to attack Medicare or Medicaid. They were created in 1965 to cover people who otherwise could not afford care. I say it because a hospital's finances follow its payer mix, and anyone proposing to change the rates paid by those programs should understand that a small hospital feels the change first. (For how the parts of Medicare work, see Medicare part by part, what A, B, C and D cover and who pays.)

3. What did the Hill-Burton Act do?

It built a lot of the rural hospitals we still have. The Hospital Survey and Construction Act of 1946, known as Hill-Burton after its Senate sponsors, gave federal money to states and communities to build hospitals and other health facilities, with special attention to places that had none. In exchange, the facilities took on obligations, including providing a reasonable amount of free or reduced-cost care. Over the following decades, thousands of facilities received Hill-Burton help.

The lesson is worth noticing. The federal government paid for the bricks, but the community had to keep the hospital running. In a lot of places, construction money was the easy part. Paying for the doctors, nurses and supplies, year after year, on a thin patient base, was the hard part.

The federal labels

4. What is a critical access hospital?

It is a special federal label created by the Balanced Budget Act of 1997 for small rural hospitals. To qualify, a hospital generally must have no more than 25 inpatient beds, offer 24-hour emergency care, keep patients on average no longer than about four days, and be located a certain distance from other hospitals (with state-specific exceptions for facilities that were designated earlier). In exchange, Medicare pays a critical access hospital based on its costs rather than a fixed rate for each service, at 101 percent of its reasonable costs for most Medicare services.

Cost-based payment is a big deal. It means the hospital is reimbursed for what it actually spends, not for a national average that may be too low for a place with few patients. Many rural hospitals have taken the designation to stay alive.

5. If critical access status helps, what is the catch?

There are a few, and the first is the bed cap. A hospital that grows past 25 inpatient beds loses the designation and the cost-based payment that goes with it, which is a disincentive to grow. A second is that cost-based payment rewards spending, a feature any budget hawk should notice. If you pay hospitals for whatever they spend, you give them less reason to economize, and you need audits to keep an eye on them. A third is that the label does not fix the underlying shortage of patients.

I would call critical access a lifeline, not a cure. It keeps some hospitals open, and it does so by acknowledging that the standard Medicare payment formulas were designed for larger hospitals. The honest policy question is whether a more flexible set of rules could do the job with less cost and less paperwork.

6. What is a Rural Emergency Hospital?

It is a newer option. Congress created the Rural Emergency Hospital designation in a law passed at the end of 2020, with the program starting in 2023. The idea is for a small hospital that cannot keep up its inpatient beds to convert to a facility that provides emergency and outpatient services only, with no inpatient stays. In exchange, it gets a fixed monthly payment from Medicare on top of increased payment for outpatient services.

Supporters say it lets a town keep its emergency room, which is often the thing it values most, when it cannot afford inpatient beds. Critics worry that it makes it easier to give up inpatient care for good, which means a local patient who needs to be admitted goes to another town. Both points are fair. A town that converts is making a hard choice between keeping something and keeping nothing, and policy should make that choice easier, not pretend it does not exist.

Coverage and the people problem

7. Does expanding Medicaid help or hurt rural hospitals?

This is one of the most argued questions in health policy, so let me state both sides at their strongest and not pretend it is simple.

Supporters of Medicaid expansion say that when more low-income adults have insurance, hospitals get paid for care that otherwise goes uncompensated, and that helps the budgets of small hospitals with a high share of uninsured patients. Opponents argue that expansion shifts the cost to taxpayers and states, that Medicaid rates are below private rates and may not cover costs, that it can crowd out private coverage, and that a hospital's survival should not depend on a program that the state may struggle to afford. Reasonable people on both sides can point to evidence, and the results differ by state. I will leave the numbers to the researchers and the state budget offices. What I will say is that any state deciding the question should look at its own hospitals' payer mix and its own budget, not at slogans.

8. Why is it so hard for a small town to find a doctor?

Part of the answer is the pipeline. Medicare helps pay for the training of new doctors through what is called graduate medical education, the residency years after medical school. The Balanced Budget Act of 1997 capped the number of residency positions that Medicare would support at roughly the levels of the mid-1990s, and later laws have added some slots. Doctors tend to settle near where they train, so a shortage of training positions, especially in rural and small-town programs, narrows the pipeline to the places that need it most. Rural residency programs and rural training tracks are one policy tool, and so are loan-repayment programs for those who agree to practice in underserved areas.

A second part is life. A doctor needs a spouse who can find work, schools for the kids, and colleagues to share the call schedule. A town that can offer those has a better shot. A hospital with a single physician on call every night burns that physician out.

Technology and the rules

9. Can telehealth fill the gap?

Partly. Telehealth, meaning care delivered by video or phone, can bring a specialist to a rural clinic and spare a patient a long drive. Before the pandemic, Medicare's telehealth rules were limited mainly to patients in rural areas who went to a designated clinic or facility to connect. During the pandemic, many of those limits were relaxed, and Congress has extended some of the flexibilities in pieces. Check the current status of the rules before you rely on any particular one.

Two cautions. First, telehealth needs a good connection, which circles back to the infrastructure story in Light Came First, and What Rural Electrification Teaches About Broadband. Second, telehealth is not a substitute for an emergency room, a lab or a surgeon down the road. It is an addition to a local system, not a replacement.

10. What are scope-of-practice laws, and why do they matter?

Scope-of-practice laws decide what each kind of licensed professional may do. States set them, and they differ widely. Nurse practitioners and physician assistants, for example, may be allowed in some states to diagnose, treat and prescribe on their own, and in other states only under a physician's supervision or a formal agreement. In a small town with one doctor or none, those rules decide whether a clinic can open.

The argument for loosening them is that a professional trained and licensed to do a task should be allowed to do it, especially when the alternative is no care within fifty miles. The argument for keeping tighter rules is patient safety and the value of physician oversight. I lean toward trusting qualified professionals to practice at the level of their training, and that is the same instinct that explains why the license you need to braid hair and the jobs it quietly kills is a good read about licensing gone too far. But the details are for your state legislature, and they should be decided on evidence about safety and access.

11. What are certificate-of-need laws?

A certificate-of-need law, called CON for short, requires a hospital or provider to get a state's permission before it builds a new facility, buys expensive equipment or adds beds. Congress pushed the states toward these laws in 1974, as part of a national health-planning law, and repealed the federal requirement in the 1980s. Many states kept their own.

The case for CON is that it prevents duplication and protects existing community hospitals from competitors who might skim the most profitable services, such as outpatient surgery, and leave the local hospital with the unprofitable ones. The case against is that it is a government-granted shield against competition, that existing hospitals often get to testify against their would-be rivals, and that it can keep new providers out of the very rural areas that need them. I find the case against more persuasive, because the rule on the books often protects the incumbent more than the patient. But reasonable lawmakers disagree, and the evidence is contested. Your state's version is on your legislature's website. (For a broader look at the cost of this kind of rule, see Regulation protects us, so why count the cost? Because someone pays it.)

What a rural town can actually do

If your local hospital is in trouble, here are the levers that exist, in plain language.

1. Find out its designation. Is it a critical access hospital? A sole community hospital? Understanding the payment rules tells you what is possible.
2. Look at the payer mix. The hospital's board can tell you where its patients' bills come from.
3. Look at the staffing pipeline. Does the area have a residency or training program, loan repayment, or a pool of nurse practitioners?
4. Check state law on scope of practice and certificate of need. These are decided in your capital, and they are within your voters' reach.
5. Be honest about options. A community that loves its inpatient beds may need to consider whether a Rural Emergency Hospital conversion would keep the emergency room open when the alternative is closure.

The farm economy and the hospital economy are tied together, since hospitals are often among the largest employers in a rural county. That is one more reason why the debates over farm policy in From the 1933 Farm Act to Freedom to Farm, How the Safety Net Got Built and the health policy in this post belong in the same conversation.

The bottom line

• A rural hospital is a high-fixed-cost business with too few patients. That, not bad management, is the core of the problem, and any serious fix has to address the math.
• The federal tools are designations and payment rules. Critical access status and the Rural Emergency Hospital option keep some doors open, but they come with trade-offs.
• Rules about doctors, nurses and new facilities are decided by your state. Scope-of-practice and certificate-of-need laws are worth reading and worth asking your legislator about.
• Ask your hospital board three questions. What is our designation, what is our payer mix, and what is our plan for staffing the emergency room next year?
• Policy is not medicine. If you or a family member needs care, call a doctor or go to the nearest emergency room. Do not rely on a policy article for any health decision.