A recent study published in Health Affairs found that the incidents of dual classification have exploded over the past decade, increasing the money dual-classified hospitals get to run their operations, while rural hospitals continue to struggle.
According to the study, the number of geographically urban hospitals located in urban areas that are dual-classified rose from three in 2017 to 425 in 2023. More than three-quarters of dual-classified hospitals were nonprofit, including many large academic medical centers in metropolitan areas.
“Dual classification” is a practice that exploits a loophole in the system, the research team explained. Dual classification lets hospitals take advantage of programs to keep struggling rural hospitals from closing, while continuing to benefit from higher Medicare and Medicaid reimbursements for urban labor. The biggest benefit to dual classification is the effect on their bottom lines.
Yang Wang, assistant research professor in the Department of Health Policy and Management at Johns Hopkins Bloomberg School of Public Health, the lead researcher for the study, said that because there is a finite amount of federal funding, the dual classification practice takes money that could be used for rural hospitals and sends it to urban ones instead.
“If these dual-classified urban hospitals are actually becoming the majority of the rural administered hospitals, when you look at it by hospital bed size, that means they are likely to absorb probably a lot of the subsidies that are targeted towards rural hospitals which could indirectly deviate the funds away from (actual) rural hospitals,” he said in an interview with the Daily Yonder.
The practice stems from changes in the way the federal Centers for Medicare and Medicaid Services (CMS) implements policies. Since 1981, CMS has implemented various policies to support the financial viability of rural hospitals. Those hospitals that are considered rural for payment purposes (“administratively rural”) can apply for statuses that allow them to receive more generous reimbursement rates from the Medicare program. To be considered administratively rural, facilities must be located within a metropolitan statistical area considered urban by U.S. Census data, but in a county that is considered rural. The hospital also needs to receive an official urban-to-rural reclassification from CMS.
Once the hospital is considered administratively rural, it is eligible for a variety of programs intended to help rural hospitals, like more generous reimbursement rates from CMS and a lower threshold to be eligible for a federal drug pricing program. Additionally, they receive 30% more slots for resident medical students and, by extension, more funding from the federal government via direct and indirect graduate medical education payments.
A congressional leader has publicly criticized the practice. “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,” U.S. Representative Jason Smith from Missouri, chair of the House Ways and Means Committee, said in a statement. “As the committee with jurisdiction over Medicare hospital payments, we must restore integrity, commonsense, and balance to the system.”
Since 2006, more than 110 rural hospitals have closed, according to the Sheps Center for Health Services Research. At the same time, the study found, the top 20 hospitals using the dual classification process have seen a combined net patient revenue exceeding $80 million in one year.
The practice allows some urban hospitals to “have their cake and eat it too,” another study by the National Grange found.
“Because there is no requirement for these hospitals to provide additional rural patient services, there is no visibility into how these additional dollars impact patient care,” the organization argued in the report.
At Grange, researchers assessed the general financial health of a hospital and then compared dual-classified hospitals to other hospitals. Their research found that dual classified hospitals have higher general fund balances, and those balances increased at a greater rate compared to urban-only hospitals or true rural hospitals.
“In 2023, dually classified hospitals reported $1.1 million in general funds per bed compared to urban ($0.9 million) and rural ($0.8 million) hospitals,” the report said. “When applied to the bed count, this translates to an estimated general fund balance of approximately $299.7 million for dually classified hospitals, compared with $139.9 million for hospitals classified as urban only and $39.6 million for geographically rural hospitals.”
Burton Eller, National Grange legislative director, said the money should go to where it was intended.
“What we’re saying is in a program that was designed for facilities that serve and keep their doors open for ‘low pay’ers and ‘no pay’ers. It was designed so they could keep their doors open for anybody,” Eller said in an interview with the Daily Yonder. “These large urban hospitals and teaching hospitals, they don’t need it. I mean, they’ve got paying customers that they can get their operating margin from. At a certain point, is the money from these programs going to be spread out across the whole group, or are the urban hospitals going to be forced to back away from it, so we are sure we’ve got enough money for hospitals it was intended for?”
Eller said changing the system means closing the loophole and monitoring who uses the classifications.
“We’ve got to make sure that it’s truly rural and underserved. I think we’ve got to have a definition that we can’t run a Mack truck through,” he said. “If I’m the operations manager of a large urban or teaching hospital, I’m going to try to run something through that loophole and improve my bottom line, but we’ve got to close those loopholes.”
Because leaving that loophole open puts rural hospitals at risk, the organization said.
“Every dollar shifted to dually classified hospitals is a dollar not available to shore up the rural safety net, weakening already fragile hospitals, hastening closures, and reducing access to care in the communities that need it most,” according to the Grange report.
“Closing the dual-classification loophole would free up resources that could be redirected back to truly rural providers. Linking rural payment benefits to geographic rurality would align policy with need, protect access, and support the long-term viability of rural health care.”
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