Critical Access Hospitals (CAHs) are vital in delivering healthcare services to the approximately 60 million Americans living in rural areas. By providing essential inpatient, outpatient, and emergency services, CAHs often become the main point of care for underserved communities located far from larger medical centers.

They also operate under different Medicare Conditions of Participation than their urban counterparts and receive specific benefits under Medicare reimbursement policies.

Background

The CAH designation was established under the Balanced Budget Act of 1997 (BBA), as Congress recognized that rural hospitals were struggling to keep their doors open due to declining patient volumes, declining revenues, and rising costs.

The BBA also established the Medicare Rural Hospital Flexibility Program (Flex Program), which provides grants to states through the State Offices of Rural Health Program to support CAHs

Eligibility and Requirements for CAH Designation

To qualify as a CAH, a facility must be designated as such by the state in which it operates and meet federal criteria. CAHs must be in rural areas (defined as an area outside an urbanized area or urban cluster). They must be at least 35 miles from any other hospital or 15 miles from other hospitals in areas with mountainous terrain or secondary roads.

Except for rehabilitation or inpatient psychiatric beds, as discussed below, CAHs are limited to a maximum of 25 inpatient beds. These beds can be used for acute care or swing-bed services for patients needing post-hospital or skilled nursing care.

The average length of stay (LOS) for acute care patients in a CAH must not exceed 96 hours. This requirement ensures that CAHs focus on providing short-term care and stabilizing patients before transferring them to larger facilities as necessary. Swing bed census is not considered when calculating average LOS.

CAHs must also maintain round-the-clock emergency services, with “a doctor of medicine or osteopathy, a physician assistant, a nurse practitioner, or a clinical nurse specialist, with training or experience in emergency care” on-site or on call in and available within 30 minutes. The timeline for response may be extended to 60 minutes in frontier areas or under other specified circumstances. In addition, the standard for clinical staffing may be relaxed to allow for the provision of care by a registered nurse with training and experience in emergency care if a facility has ten beds or fewer, if a CAH is in a frontier area, or at the request of a state’s governor after consultation with their state boards of medicine and nursing.

Reimbursement and Payment Models

Unlike other hospitals that are reimbursed under the Hospital Inpatient Prospective Payment System (IPPS) or Outpatient Prospective Payment System (OPPS), CAHs are paid using a “cost-based” reimbursement model. Medicare reimburses CAHs at 101% of their reasonable and allowable costs for services provided to Medicare beneficiaries rather than fixed payment rates.[1] This cost-based payment model is designed to ensure that CAHs can cover their operating costs and continue providing essential services in rural areas.

Since the passage of the Patient Protection and Affordable Care Act, CAHs have also been eligible for participation in the 340B Program. The program, which is administered by the Office of Pharmacy Affairs within the Health Resources and Services Administration (HRSA), allows eligible entities to purchase both prescription and non-prescription outpatient drugs at reduced prices. Evidence indicates that CAH participation in 340B is associated with the provision of nonprofitable service lines, suggesting that the savings generated through 340B are often used to support other essential services.

Behavioral Health

Under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, CAHs are allowed to have a maximum of 10 inpatient psychiatric beds. These do not count towards the 25-bed limit and are not considered in average LOS calculations. CMS pays for behavioral health services rendered through a CAH’s inpatient psychiatric department under the Inpatient Psychiatric Facility Prospective Payment System rate rather than a cost-plus model.

A 2023 U.S. Government Accountability Office study found that administrators of CAHs with inpatient psychiatric departments felt current reimbursement rates were sufficient to maintain them. In contrast, those without such departments viewed prospective payment model reimbursements as a barrier to establishing these programs.

Outcomes and quality reporting

As of July 2024, there were 1,367 CAHs across 45 states. Nearly all of them participate in the Medicare Beneficiary Quality Improvement Program (MBQIP). As healthcare moves to a value-based model, the low patient volumes that characterize CAHs can make quality comparisons difficult. However, research suggests emergency outcomes are comparable to those in larger hospitals.

Challenges

Although the cost-plus reimbursement structure was adopted to offer CAHs greater financial stability, almost a third of CAHs are at risk of closure due to of low patient volumes, high operational costs, and limited resources. CAHs also face unique challenges in responding to broader healthcare issues.

Workforce issues

While hospitals across the United States are struggling to maintain adequate staffing in the face of a healthcare workforce shortage, CAHs may find it especially difficult to recruit and retain staff. Their geographic isolation, lower salaries, and fewer opportunities for career advancement often make them less attractive to prospective employees than larger, urban hospitals. This can create a domino effect, with gaps in nursing, primary care, and specialty services placing additional strain on existing staff and making the impact of turnover more pronounced than in larger facilities.

Cybersecurity

As Applied Policy has previously reported, cybersecurity is a growing concern across the healthcare sector, and here, again, CAHs are at a special disadvantage. A recent study by the University of Minnesota School of Public Health found that although urban hospitals were more likely to be targeted by ransomware attacks, rural hospitals, including CAHs, were ultimately more vulnerable.

CAHs may not be able to afford the necessary IT upgrades to protect from cyber threats. Moreover, when their technology systems are successfully targeted in ransomware attacks, CAHs typically do not have the immediate option of transferring patients or diverting incoming transports to a nearby facility.

Recognizing these vulnerabilities, the Biden Administration partnered with Microsoft and Google this summer to enhance cybersecurity resources for rural hospitals. The agreement provides security assessments and products for free or at reduced rates. However, uptake has been slow, with less than a quarter of CAHs taking advantage of the resources as of last month.

SDoHs

The cost-plus reimbursement model of the BBA was adopted before today’s understanding of the importance of social determinants of health (SDoHs). As such, it does not include direct mechanisms to  fund or support programs addressing SDoHs. Despite the fact that the rural populations served by CAHs, may face greater social stresses, a 2023 study found that “CAHs may lag relative to their urban and non-CAH counterparts in their ability to address the non-medical needs of their patients and broader communities.”

Growth in Medicare Advantage

When the CAH designation and cost-plus reimbursement model were established, only 14% of Medicare beneficiaries participated in Medicare Advantage (MA) plans. As MA has become the preferred enrollment choice among Medicare beneficiaries, the cost-plus model has become less relevant. The decline in fee-for-service enrollment has created a direct financial strain on CAHs. Additionally, stand-alone CAHs often do not have the personnel or financial leverage to successfully negotiate favorable contracts with MA plans.

Future Considerations

The ongoing viability of CAHs is dependent upon state and federal policies and broader healthcare reforms. Efforts to improve the quality of care, enhance operational efficiency, and explore alternative payment models will be central to ensuring that CAHs continue to serve rural communities effectively.

[1] The Medicare Payment Advisory Commission notes that “CAHs may not receive fully 101 percent of their costs under current law due to payment reductions imposed by a budget sequester on Medicare payments and limits on the share of hospital bad-debt payments reimbursable by Medicare.”