Rural Emergency Hospitals: Relief for the Weary?

On December 27, 2020, the Centers for Medicare & Medicaid (“CMS”) of the Department of Health and Human Services created a new provider type for embattled rural[1] and critical access hospitals (“CAHs”)[2]—the Rural Emergency Hospital (“REH”).[3] Designation as an REH allows for a suspension of a hospital’s inpatient operations while maintaining emergency department and outpatient services, thus allowing many rural hospitals to discontinue inpatient operations that are no longer financially sustainable. Hospitals choosing to convert to an REH model are reimbursed differently than existing rural hospitals or CAHs, receiving a monthly facility payment and payment for “REH services” in an amount of 105% of the Outpatient Prospective Payment System (OPPS).[4] Additional flexibility under the Stark Law has also been given to encourage physician investment in the REH model. However, the removal of inpatient services from rural communities is not without its critics, and the REH provider type is no panacea for all of the challenges currently faced by struggling rural hospitals.

Struggle of Rural Hospitals

The struggle of rural hospitals has been well documented in recent years, with 194 rural hospitals either no longer providing inpatient services or shutting their doors since January of 2005.[5] Common reasons cited for closure include health insurance plans failing to sufficiently reimburse rural hospitals for the cost of delivering services to patients, inflation, workforce shortages, and low financial reserves.[6] These issues were exacerbated by the COVID-19 pandemic, which caused declining financial margins and patient volumes resulting in 19 closures alone in 2020.[7]

Of those challenges faced by rural hospitals, low patient volume in rural areas can cause difficulties both in maintaining fixed operating costs and participating in performance measurement and quality improvement programs.[8] In 2019, approximately two-fifths of rural hospitals had negative operating margins, and median operating margins among rural hospitals were 1.5%, compared to 5.2% among other hospitals.[9] And according to one report from the Center for Healthcare Quality and Payment Reform, in at least half of U.S. states 25% or more of the state’s rural hospitals are at risk of closing.[10] That number rises to 40% in at least 12 states.[11]

Further, rural hospitals usually serve a disproportionate share of uninsured and Medicaid patients, with fewer private pay patients (often reimbursed at higher rates) than their urban counterparts.[12] Costs of providing healthcare at rural hospitals are also greater than those in urban areas due to the “smaller number of patients served relative to the fixed costs of the services.”[13] A common example is the provision of emergency services in a rural community—such services must be provided on a 24/7 basis, keeping costs comparable between many similarly-sized rural and urban hospitals. However, the number of admissions to the emergency departments of rural hospitals tend to be significantly fewer, resulting in a higher average cost per visit for rural hospitals.[14] This trend is reflected in acute care generally, with the acute occupancy rate for rural hospitals (37%) being less than two-thirds of that for urban hospitals (62%).[15]

With rising costs outpacing current reimbursement models, rural hospitals must look to new approaches to remain sustainable.

A New Model: Rural Emergency Hospitals

In order to qualify as an REH, hospitals must have less than 50 beds and been designated as a rural hospital or CAH prior to December 27, 2021.[16] The hospitals must further meet certain Conditions of Participation (“CoPs”) promulgated by CMS in order to enroll, including that they have: 1) a transfer agreement with a Level I or Level II trauma center; 2) an appropriately staffed emergency department 24 hours a day, 7 days a week; and 3) a physician, nurse practitioner, clinical nurse specialist, or physician assistant available to provide rural emergency hospital services 24 hours a day.[17] A qualifying hospital converting to an REH model must also discontinue its inpatient services.[18]

Each REH provides “rural emergency hospital services,” which include emergency department services and observational care which “do not exceed an annual per-patient average of 24 hours” in the REH.[19] Basic laboratory services,[20] radiology services,[21] and pharmaceutical services[22] are also required, as well as 24-hour nursing services.[23] A rural hospital may also provide outpatient services[24] at their election, which may include—but is not limited to—radiology, laboratory, outpatient rehabilitation, surgical, maternal health, and behavioral health services.[25] To the extent the outpatient services are specialty services, the REH must have a physician or advanced practitioner with training in the specialty service area in accordance with their scope of practice.[26] 

Remaining CoPs require that each REH have either an effective governing body or responsible individuals that are legally responsible for the conduct of the REH, including the services provided and appointment of appropriate medical staff.[27] Policies and procedures must be developed for the delivery of health care services, including post-acute care needs of patients. Each REH must have facility-wide programs for emergency preparedness and infection prevention and control in conjunction with an “effective, ongoing . . . data-driven quality assessment and performance improvement (QAPI) program.”[28]

Hospitals qualified pursuant to the above requirements and CoPs can enroll in Medicare and begin receiving payment as an REH.

Higher Outpatient Reimbursement, Monthly Facility Payments, and Physician Investment

Rural hospitals and CAHs choosing to designate as an REH will move away from their existing prospective payment or cost-based system[29] to a new reimbursement model for many of the “rural emergency hospital services” described above. For such outpatient services, Medicare will pay for 105% of the OPPS amount it would otherwise pay for such services, with copayment amounts based on the 100% OPPS rate.[30] Such payments are subject to existing OPPS payment policies and are limited to those services defined as “covered OPD services” for existing hospital outpatient department services.[31]

Each REH will additionally receive “facility payments” in 12 monthly installments.[32] These payments are calculated pursuant to statute, with initial payments in 2023 starting at $272,866 per month, and an increase in accordance with the “hospital market basket percentage increase” for each subsequent year.[33] REHs must further “maintain detailed information as specified by the Secretary as to how the [REH] has used the [facility payments],” which must be made available upon request.[34]

For any services furnished by an REH that do not meet the definition of “rural emergency hospital services,” REHs will be paid based upon the applicable Medicare fee-for-service system.[35] Such services include professional services rendered by a physician or nurse practitioner, physical therapy services, certain laboratory services paid under the Clinical Laboratory Fee Schedule.[36] Notably, this means certain services an REH is required to provide will not be considered “rural emergency hospital services” as they are not reimbursable by the OPPS as “covered OPD services.” Such excluded services also include “medical health diagnostic and therapeutic items and services commonly furnished in a physician’s office,” such as radiology, laboratory, outpatient rehabilitation, surgical, maternal health, and behavioral health services, which an REH may provide at its option.[37]

In addition to these payment changes, hospitals which classify as an REH may be owned by community physicians which operate as a source of referrals for the REH—a practice currently prohibited under the Stark Law[38] since passage of the Affordable Care Act (“ACA”).[39] While Stark Law remains applicable to REHs,[40] CMS chose not to define REHs as “hospitals” for purposes of Stark. This allows REHs to meet Stark’s “rural ownership” exception[41] without falling under the ACA’s prohibition on new physician investments in “hospitals.”

Concern Remains Over Impact of Conversion on Rural Communities

Despite financial incentives and ownership flexibilities, the REH model may not be feasible for some rural hospitals for both practical and financial reasons. Many rural communities do not view the closure of inpatient services as a viable option, and because most at-risk hospitals are in isolated rural communities, closure of a hospital means residents of these communities will need to travel long distances for inpatient care—possibly to another state.[42] Lack of inpatient services may further affect a rural community’s ability to recruit and maintain a healthy workforce.[43] For those rural hospitals owned by a local municipality, closure of inpatient services can also defeat the very purpose for which such hospitals were created.

Critics have argued that facilities may lose money by eliminating inpatient care because “[i]n reality, about half of the services at the average rural hospital are delivered to patients with private insurance (both employer-sponsored insurance and Medicare Advantage plans).”[44] Thus, the argument goes that amounts paid by private plans—not Medicare and Medicaid—determine whether a rural hospital will have to close, making the conversion to REH an unnecessary elimination of community health care services.[45] Such insurers are not obligated to follow Medicare’s lead in reimbursement of REHs.

Finally, conversion could impact a hospital’s ability to take part in existing payment savings programs, such as the Health Resources and Services Administration’s 340B drug program. The 340B drug program requires pharmaceutical manufacturers participating in Medicaid to sell outpatient drugs at discounted prices to providers that care for uninsured and low-income patients, allowing enrolled hospitals to achieve average savings of 25-50% in pharmaceutical purchases.[46] Conversion to an REH will eliminate the ability of some eligible hospitals to participate in such a program.[47]

An Imperfect Solution

While the REH model may provide greater reimbursement to a segment of struggling rural hospitals and CAHs, the closure of their inpatient services will undoubtedly have a profound impact on their communities. However, the ability of the REH provider type to allow for such hospitals to shutter what is often the most beleaguered facet of their business may help these hospitals remain financially solvent to provide services and jobs in their rural community. While not a perfect solution, the REH model can provide financial relief to many rural hospitals on the verge of calling it quits.

[1] A “rural Hospital” must be located in a “rural area,” defined as an area outside a Metropolitan Statistical Area as defined by the U.S. Office of Management and Budget. 42 U.S.C. § 1395ww(d)(2)(D). However, a hospital located in an urban area may still be reclassified as rural under certain conditions. See 42 C.F.R. § 412.103.

[2] Many rural hospitals are enrolled as CAHs, which are a separate provider type from other hospitals with their own Medicare Conditions of Participation and a separate payment method., Critical Access Hospitals, available at A CAH must be located more than 35 miles from the nearest hospital (15 miles in areas with mountainous terrain or only secondary roads) and have no more than 25 inpatient beds, in additional to other CoPs. Id.; see also 42 C.F.R. § 485 subpart F.

[3] H.R. 133, 116th Cong. § 125 (2021) (The Consolidation Appropriations Act of 2021).

[4] The OPPS is a method of reimbursement in which Medicare payment is made for outpatient services based on a predetermined, fixed amount. See Prospective Payment Systems – General Information, CMS (Nov. 15, 2022), available at text=A%20Prospective%20Payment%20System%20(PPS,on%20a%20predetermined%2C%20fixed%20amount.

[5] 194 Rural Hospital Closures and Conversions Since January 2005, The Cecil G. Sheps Center for Health Services Research, available at

[6] How to Prevent Rural Hospital Closures, Center for Healthcare Quality and Payment Reform, available at “These hospitals have lost money delivering patient services over a multi-year period (excluding the first year of the pandemic), and they are unlikely to receive sufficient funds from other sources to cover those losses after federal pandemic assistance ends.” Struggling hospitals often have more debts than assets, with little means to cover increasing costs to deliver patient services. Id.

[7] Rural Hospital Closures Threaten Access, American Hospital Association, at 5 (Sept. 2022), available at

Of these closures, 73 were complete hospital closures, whereas 63 were “converted closures” in which the facility closed its inpatient unit but continued provide other health services, such as emergency, rehabilitation, and outpatient services at the same physical location. 194 Rural Hospital Closures and Conversions Since January 2005, The Cecil G. Sheps Center for Health Services Research, available at

[8] Id.

[9] Rural Hospitals Face Renewed Financial Challenges, Especially in States That Have Not Expanded Medicaid, KFF, available at

[10] Rural Hospitals at Risk of Closing, Center for Healthcare Quality & Payment Reform, at 1, available at

[11] Id.

[12] Rural Hospital Closures Threaten Access, American Hospital Association, at 5-6 (Sept. 2022) (“Because rural hospitals are more likely to serve a population that relies on Medicare and Medicaid, rural hospitals are not able to offset low public program payment rates with revenue from patients with commercial coverage, which often has higher reimbursement rates than government payers.”).

[13] Rural Hospitals at Risk of Closing, Center for Healthcare Quality & Payment Reform, at 2, available at

[14] Id. at 3.

[15] Rural Hospital Closures Threaten Access, American Hospital Association, p.4 (Sept. 2022).

[16] 42 U.S.C. § 1395x(kkk)(3)(A)-(B). This limits hospitals which may have had an option to previously self-designate as “rural” through CMS’ Medicare Geographic Classification Review Board but chose not to do so. However, this has not stopped some hospitals from applying for REH designation notwithstanding, and in some instances, CMS has granted REH status regardless of prior designation as “urban” rather than rural. See Holly Springs hospital receives official rural emergency hospital designation, Bose, Devna, Mississippi Today (May 9, 2023) (confirming the hospital received REH status after Mississippi’s state health officer provided a letter confirming the hospital as rural, despite the hospital being located in an urban area “too close to Memphis, Tennessee”), available at

[17] 42 U.S.C. § 1395x(kkk)(2); MLN Fact Sheet: Rural Emergency Hospitals, MLN2259384 (Oct. 2022), available at

[18] 42 U.S.C. § 1395x(kkk)(2)(B). The definition of inpatient services does include post-hospital extended care services in a distinct part unit of a hospital licensed as a skilled nursing facility. 42 U.S.C. § 1395x(kkk)(6)(A).

[19] 42 U.S.C. § 1395x(kkk)(1)(A).

[20] 42 C.F.R. § 485.518 (“The REH must provide basic laboratory services essential to the immediate diagnosis and treatment of the patient. . . .”).

[21] 42 C.F.R. § 485.520. Diagnostic radiologic services are required at a minimum, while therapeutic radiologic services may also be provided. Id.

[22] 42 C.F.R. § 485.522 (“The REH must have pharmaceutical services that meet the needs of its patients. The REH must have a pharmacy or a drug storage area that is directed by a registered pharmacist or other qualified individual in accordance with state scope of practice laws.”).

[23] 42 C.F.R. § 485.530.

[24] 42 U.S.C. § 1395x(kkk)(1)(A), (2)(A)-(B); 42 C.F.R. § 485.502.

[25] 42 C.F.R. § 485.524(a).

[26] 42 C.F.R. § 485.524(b)(3).

[27] 42 C.F.R. 485.510(a)-(b).

[28] 42 C.F.R. § 526; 42 C.F.R. § 536.

[29] Rural hospitals not designated as a CAH are paid on prospective payment systems for both inpatient stays under Medicare Part A (the inpatient prospective payment system (“IPPS”) is categorized into different diagnosis-related groups (“DRGs”) to categorize patient stays) and outpatient care pursuant to the OPPS, whereas CAHs receive “cost-based” reimbursement for 101% of their reasonable costs for most inpatient and outpatient services. Information for Critical Access Hospitals, Medicare Learning Network MLN006400, at 5 (April 2023), available at

[30] 42 U.S.C. § 1395m(x)(1); 42 C.F.R. § 419.92(a).

[31] See 87 Fed. Reg. 71748, 72162 (Nov. 23, 2022); 42 U.S.C. § 1395l(t)(1)(B).

[32] 42 U.S.C. § 1395m(x)(2)(B).

[33] 42 U.S.C. § 1395m(x)(2); see also MLN Fact Sheet: Rural Emergency Hospitals, Medicare Learning Network MLN2259384 (Oct. 2022), available at

[34] 42 U.S.C. § 1395m(x)(2)(D).

[35] 42 C.F.R. § 419.92(c).

[36] Those services excluded from payment under the OPPS, and which cannot therefore be considered REH services, are set forth at 42 C.F.R. § 419.22. See also 87 Fed. Reg. 71748, 72164 (Nov. 23, 2022) (“However, section 125 of the CAA is silent on how CMS should pay for other services furnished by an REH, such as services paid under the Clinical Laboratory Fee Schedule (CLFS) or outpatient therapy services, that may be provided on an outpatient basis by hospital outpatient departments, but that are not covered OPD services. . . .”).

[37] Id.

[38] Stark Law generally prohibits a physician from making referrals to an entity for certain “designated health services” (“DHS”) when the physician has a financial relationship with that entity. 42 U.S.C. § 1395nn(a).

[39] Following the Affordable Care Act, the “whole hospital exception,” which previously allowed for physician investment in an entire hospital, was amended to prohibit any physician investment or ownership in hospitals if such investment did not occur before or within 18 months after March 23, 2010. See 42 U.S.C. § 1395nn(d)(3)(D), (i)(1).

[40] For purposes of Stark, an REH is an “entity” which provides DHS, and Stark is therefore applicable to investing physicians who refer to the REH for DHS. See 42 C.F.R. § 411.354.

[41] 42 C.F.R. § 411.356(c)(1) (allowing for ownership or investment in a “rural” provider which furnishes 75% or more of its DHS to residents of a rural area). Such ownership does not constitute a “financial relationship” for purposes of Stark.

[42] New rural hospital model a lifeline for some, a gamble for others, Arielle Dreher, Axios (Jan. 23, 2023), available at

[43] Problems and Solutions for Rural Hospitals, Center for Healthcare Quality and Payment Reform (“Farms, ranches, mines, drilling sites, wind farms, and solar energy facilities cannot function without an adequate, healthy workforce, and people are less likely to live or work in rural communities that do not have an emergency department and other healthcare services.”), available at

[44] Rural Hospitals at Risk of Closing, Center for Healthcare Quality & Payment Reform, at 3, available at

[45] Id. at 3 (“[T]he biggest causes of losses at most small rural hospitals are underpayments for primary care and emergency services.”).

[46] The Fact Sheet: The 340B Drug Pricing Program, American Hospital Association, at 1 (March 2023), available at

[47] See 87 Fed. Reg. 71748, 72162 (Nov. 23, 2022) (noting that HRSA, not CMS, regulates the 340B drug program).