Medicare Payment Primer: Rural Providers

This Insight is part of our Medicare Payment Primers series.

Over the last several years, Congress has authorized programs to provide enhanced Medicare reimbursement for rural providers to ensure continued access to care for beneficiaries residing in rural communities. These include the critical access hospital and rural emergency hospital programs as alternatives to reimbursement under the Medicare hospital inpatient and outpatient prospective payment systems (IPPS and OPPS); several programs to support rural hospitals reimbursed under IPPS and OPPS (PPS Hospitals); and the rural health clinic program as an alternative to reimbursement under the Medicare Physician Fee Schedule (MPFS). The following provides an overview of each program.

Critical Access Hospitals (CAHs)

A hospital licensed in the state in which it is located can be certified as a CAH under the Medicare program if the hospital meets the following regulatory requirements:

• Is located in a state that established a state rural health plan for Medicare Rural Hospital Flexibility Programs (MRHFPs). To date, Connecticut, Delaware, Maryland, New Jersey, and Rhode Island have not established MRHFP state rural health plans.
• Is located in a rural area or treated as rural under a special provision that qualifies hospital providers in urban areas. CAHs have a two-year transition period to reclassify as rural if the Office of Management and Budget changes its location designation to urban.
• Provides 24-hour emergency services, seven days a week, using on-site or on-call staff, with specific on-site, on-call staff response times.
• Does not exceed 25 beds for inpatient or swing bed services. A CAH also may operate a distinct part rehabilitation and a psychiatric unit (DPU), each with up to 10 beds.
• Reports an annual average acute care inpatient length of stay of 96 hours or less, excluding swing bed services and DPU beds.
• Is more than a 35-mile drive on primary roads from any other CAH or hospital or, in the case of mountainous terrain or in areas with only secondary roads available, a 15-mile drive. A primary road of travel for determining the driving distance of a CAH and its proximity to other providers is a numbered federal highway, including interstates, intrastates, expressways, or any other numbered federal or state highway with two or more lanes each way. Prior to January 1, 2006, a facility that did not satisfy these distance requirements still could be certified as a CAH if it was designated by the state as a necessary provider.

Under the Medicare program, CAHs are reimbursed at 101% of Medicare’s share of reasonable costs for hospital inpatient and outpatient services (refer to our Medicare Payment Primers on the mechanics of cost-based reimbursement and defining “cost”). Swing beds–using a bed for both inpatient acute and post-acute care–are also reimbursed at 101% of cost. If a CAH has beds that are designated for inpatient rehab, skilled nursing, or inpatient psychiatric services, the CAH is reimbursed under the applicable payment system for those services.

CAHs are paid 101% of cost for ambulance services if they are the only ambulance provider within 35 miles. If there is no other provider or supplier of ambulance services within a 35-mile drive of the CAH and the CAH owns and operates an entity furnishing ambulance transports that is more than a 35-mile drive from the CAH, the CAH can be reimbursed based on 101% of the reasonable cost of the transports as long as it is the closest provider of ambulance transports to the CAH.

A CAH may elect the Method II payment option for outpatient professional services, which allows the CAH to be paid 115% of what would otherwise be paid under the MPFS. Finally, CAHs automatically qualify for participation in the 340B drug discount program.

CAHs are not required to report on any quality measures, although many do so voluntarily under the Medicare Beneficiary Quality Improvement Program. Nor do CAHs participate in any of the hospital value-based purchasing programs.

Rural Emergency Hospitals

Congress created a new provider category–the rural emergency hospital (REH)–in 2020 to maintain access to hospital outpatient services in rural communities that cannot support continued inpatient services. Only CAHs and rural hospitals with 50 or fewer beds operating on December 27, 2020, are eligible for conversion to an REH; the program is not an option for a community whose CAH or hospital closed prior to that date.

An eligible CAH or hospital can be certified as an REH under the Medicare program if it meets the following regulatory requirements:

• Is located in a state that has established a process for licensing REHs.
• Does not furnish inpatient care other than post-hospital extended care services provided in a DPU licensed as a skilled nursing facility (SNF).
• Has an emergency department (ED) that is staffed 24/7.
• Provides ED and observation care.
• Maintains an annual average per patient length of stay of 24 hours or less.
• Has a transfer agreement with a Level I or II trauma center.

Medicare pays each REH a standard monthly facility payment amount, which is updated annually by the increase in the hospital market basket, regardless of the volume of services furnished by the REH. For CY 2025, the monthly payment is $285,625.90. For each emergency and outpatient service furnished to a traditional Medicare beneficiary reimbursable under OPPS, the REH is paid 105% of the applicable OPPS rate.

All other services furnished by the REH are reimbursable at the standard rate paid to hospitals for those services with no upward adjustment (e.g., therapy services reimbursable under the MPFS). If the REH maintains a DPU licensed as an SNF, it is reimbursed for services under SNF PPS. Unlike CAHS, REHs are not eligible for enhanced ambulance reimbursement, the Method II payment option, or the 340B drug discount program.

REHs are required to report on specified quality measures; although, failure to report does not impact an REH’s reimbursement. REHs do not participate in hospital value-based purchasing programs.

Programs for Rural PPS Hospitals

A. Sole Community Hospital (SCH)

A PPS Hospital is eligible for designation as an SCH if it meets one of the following four criteria. (Although only one of the criteria specifically requires the hospital to be located in a rural area, most SCHs are rural PPS Hospitals.)

1. The hospital is located more than 35 miles from other like hospitals;
2. The hospital is located between 15 and 25 miles from other like hospitals that are inaccessible because of local topography or periods of prolonged severe weather conditions for at least 30 days in each two out of three years;
3. Because of distance, posted speed limits, and predictable weather conditions, the travel time between the hospital and the nearest like hospital is at least 45 minutes; or
4. The hospital is located in a rural area, is between 25 and 35 miles from other like hospitals, and

• No more than 25% of hospitalized inpatient residents, or no more than 25% of hospitalized Medicare inpatients in the hospital’s service area, are admitted to other like hospitals within a 35-mile radius of the hospital or, if larger, within its service area; or
• Has fewer than 50 beds and would meet the 25% criterion if some beneficiaries or residents were not forced to seek care outside the service area due to the unavailability of necessary specialty services at the hospital.

The regulations further define the specifications (e.g., what constitutes a “like hospital”), detail the process to apply for SCH designation, and specify the circumstances in which a hospital’s status as an SCH will be terminated.

For inpatient services, SCH operating payments are based on the higher of the federal rate or a hospital-specific rate based on the hospital’s costs in a base year (1982, 1987, 1996, or 2006) updated to the current year and adjusted for changes in the hospital’s case mix. SCH capital payments are based on the capital base rate (like all other IPPS hospitals). For outpatient services, SCHs receive an additional adjustment set at 7.1% above the OPPS rate.

An SCH that qualifies for a disproportionate share hospital (DSH) payment receives up to a 10% adjustment, as opposed to the maximum of 5.25% received by other rural PPS hospitals. In addition, SCHs do not have to meet the proximity requirement for geographic reclassification, which could facilitate approval for reclassification to a region with a higher wage index, base payment rate, or both.

If an SCH experiences a decrease of more than 5% in total number of inpatient cases due to circumstances beyond its control, it is eligible to receive payments necessary to fully reimburse its fixed costs.

B. Medicare Dependent Hospital (MDH)

A PPS Hospital is eligible for MDH designation if it (1) is located in a rural area, (b) has 100 or fewer beds, (3) is not designated as an SCH, and (4) has at least 60% of inpatient days or discharges covered by Medicare.

For inpatient services, MDH operating payments are based on the higher of the federal rate or the federal rate plus 75% of the difference between the federal rate and the hospital-specific rate. The hospital-specific rate is based on the hospital’s historic inpatient operating costs from one of three years (1982, 1987, or 2002) trended forward to adjust for inflation and other factors. MDH capital payments are based on the capital base rate (like all other PPS Hospitals). MDHs do not receive any enhanced reimbursement for outpatient services.

Like SCHs, an MDH that experiences a decrease of more than 5% in total number of inpatient cases due to circumstances beyond its control is eligible to receive payments necessary to fully reimburse its fixed costs.

C. Low-Volume Hospital (LVH)

A PPS Hospital is eligible for LVH designation if it (1) is located more than 15 road miles from the nearest PPS Hospital and (2) has fewer than 3,800 total patient discharges (regardless of payer) in the previous year. Both SCHs and MDHs can also be designated as LVHs.

LVHs receive a payment adjustment for each Medicare discharge as follows:

• For LVHs with fewer than 500 total discharges, the payment adjustment is an additional 25% for each Medicare discharge.
• For LVHs with 500 or more total discharges, the payment adjustment for each Medicare discharge is calculated as 0.25 – [0.25/3300] x (number of total discharges – 500) = (95/330) – (number of total discharges/13,200).

LVHs have no enhanced reimbursement for outpatient services. Unlike SCHs and MDHs, LVHs are not eligible for any payment associated with a decline in inpatient cases.

D. Rural Referral Center (RRC)

A PPS Hospital located in a rural area can qualify as an RRC in two ways: First, a hospital with 275 or more beds must demonstrate that (1) at least 50% of its Medicare patients are referred from other hospitals or from physicians not on the staff of the hospital; and (2) at least 60% of its Medicare patients live more than 25 miles from the hospital, and at least 60% of all healthcare services provided to Medicare beneficiaries by the hospital are to Medicare beneficiaries who live more than 25 miles from the hospital.

Alternatively, a rural PPS Hospital can qualify as an RRC regardless of the number of beds if the hospital (1) has a case-mix index at least equal to the national case-mix index value, (2) has 5,000 discharges or, if fewer, the median number of discharges for urban hospitals in the region, and (3) meets at least one of the following:

• more than 50% of the hospital’s active medical staff are specialists;
• at least 60% of all hospital discharges are for inpatients living more than 25 miles from the hospital; or
• at least 40% of all inpatients treated at the hospital are referred from other hospitals or from physicians not on the staff of the hospital.

RRCs are reimbursed like other PPS Hospitals, but they qualify for a higher disproportionate share adjustment than other rural hospitals. While most rural PPS Hospitals have a DSH adjustment capped at 5.25%, RRCs receive an additional 0.6% adjustment for every percentage point that exceeds 30. Also, an RRC can qualify for the 340B drug discount program if it has a disproportionate share adjustment percentage greater than or equal to 8% for the most-recently filed cost report (vs. 11.75% for other PPS Hospitals). For RRCs, however, orphan drugs are excluded from the 340B discount when used to treat the rare disease or condition for which they are designated.

RRCs may also receive a geographic reclassification even if it does not demonstrate proximity to the area in which it seeks reclassification or even if its wages do not exceed 106% of the average wage in its actual wage index market. Generally, hospitals must be proximate to the labor market area to which they are seeking reclassification and must demonstrate characteristics similar to hospitals located in that area.

Both SCHs and MDHs can also be designated as RRCs if all criteria for both designations are satisfied. By definition, an LVH cannot also be designated as an RRC.

Rural Health Clinic (RHC)

Only clinics located in non-urbanized areas and designated shortage areas (specifically, a Geographic or Population-Group Primary Care Health Professional Shortage Area, a Medically Underserved Area, or a Governor-designated and Secretary-certified Shortage Area) are eligible for certification as an RHC. To satisfy the conditions of certification, an RHC must, among other criteria:

• Have a physician serving as its medical director.
• Employ a physician assistant or nurse practitioner.
• Have a non-physician practitioner available to furnish services at least 50% of the time the clinic is furnishing services (either an employee or independent contractor).
• Directly furnish routine diagnostic and laboratory services (including six specified laboratory tests).
• Provide first-response emergency care.
• Have arrangements with providers to furnish medically necessary services not available at the clinic.
• Not be primarily a mental disease treatment facility or a rehabilitation agency.

RHCs can be either independent or provider based. Independent RHCs are stand alone or freestanding clinics. Provider-based RHCs are an integral and subordinate part of a hospital, CAH, skilled nursing facility, or home health agency.

RHCs are paid an all-inclusive rate (AIR) for all medically necessary RHC services furnished by RHC practitioners on the same day, with some exceptions. The services must be provided face-to-face, except behavioral health services, which may be furnished via telehealth. The services may be provided at any location except an inpatient or outpatient department of a hospital; those professional services are reimbursed under the MPFS.

RHC practitioners include physicians, nurse practitioners, physician assistants, certified nurse-midwives, clinical social workers, clinical psychologists, marriage and family therapists, and mental health counselors. In certain cases, an RHC may provide nursing visits to patients confined to the home who are furnished by a registered professional nurse or a licensed professional nurse. Services furnished by auxiliary personnel such as nurses, medical assistants, or other clinical personnel acting under the supervision of the RHC practitioner are considered incident to the visit and are included in the per-visit payment.

The AIR is not adjusted at the individual level for the complexity of individual patient health care needs, the length of an individual visit, or the number or type of practitioners involved in the patient’s care. Medicare pays 80% of the AIR, and the beneficiary is responsible for 20% of the RHC’s charges for the services provided. Medicare pays the full AIR for specified preventive services (e.g., annual wellness visit); the beneficiary does not have any coinsurance obligation for these services.

As noted, there are limited circumstances in which an RHC will be paid more than one AIR for services furnished in a single day:

• The patient, after the first visit, suffers an illness or injury that requires additional diagnosis or treatment on the same day.
• The patient has a medical visit and a mental health visit on the same day.
• The patient has an initial preventive physical exam (IPPE) and a separate medical and/or mental health visit on the same day (two or three billable visits).

Laboratory services provided in the RHC’s laboratory and the technical component of other diagnostic tests (e.g., EKG) provided in the RHC are not included in the AIR and are billed separately. The professional component of such diagnostic tests is part of the AIR.

The AIR for independent RHCs, provider-based RHCs that are part of a hospital with 50 or more beds, and provider-based RHCs certified after December 31, 2000, is set by statute; in 2025, the AIR for these clinics is $152. The AIR for all other provider-based RHCs is the greater of the clinic’s 2020 AIR (which was calculated based on the clinic’s costs) updated annually by Medicare Economic Index or the national statutory payment limit.

General care management services (e.g., chronic care management, remote physiologic monitoring, community health integration) furnished by an RHC are reimbursed at the MPFS national non-facility rate. RHCs bill for virtual communication services under G0071 and are reimbursed at the average rate for services reimbursed under the MPFS. Continued RHC reimbursement for non-behavioral health telehealth services is tied to the continuation of certain waivers of Medicare coverage requirements for telehealth services.

Starting July 1, 2025, an RHC can bill for all four types of Part B preventive vaccines— pneumococcal, influenza, hepatitis B, and COVID-19 vaccines and their administration—at the time of service with or without a qualifying visit. An RHC must annually reconcile any payments received at the time of service with the RHC’s actual vaccine and vaccine administration costs on its cost reports.

Resources

Critical Access Hospitals: https://www.cms.gov/files/document/mln006400-information-critical-access-hospitals.pdf

Rural Emergency Hospitals: https://www.cms.gov/files/document/mln2259384-rural-emergency-hospitals.pdf; https://www.cms.gov/medicare/health-safety-standards/guidance-for-laws-regulations/hospitals/rural-emergency-hospitals

Sole Community Hospitals: 42 CFR §412.92 –  https://www.ecfr.gov/current/title-42/chapter-IV/subchapter-B/part-412/subpart-G

Medicare Dependent Hospitals: https://www.gao.gov/assets/gao-20-300.pdf

Low-volume Hospitals: https://www.cms.gov/files/document/mm13103-extension-changes-low-volume-hospital-payment-adjustment-medicare-dependent-hospital-program.pdf

Rural Referral Centers: 42 CFR § 412.96 – https://www.ecfr.gov/current/title-42/chapter-IV/subchapter-B/part-412/subpart-G/section-412.96

Rural Health Clinics: https://www.cms.gov/regulations-and-guidance/guidance/manuals/downloads/bp102c13.pdf; https://www.medpac.gov/wp-content/uploads/2022/10/MedPAC_Payment_Basics_23_FQHC_FINAL_SEC.pdf

This Insight is part of our Medicare Payment Primers series. If you have questions about Medicare reimbursement for rural providers or regulatory requirements and compliance, our executives are happy to assist.