Medicaid Impacts on Rural Hospitals

Background

Rural hospitals account for about one-third of all community hospitals nationwide and at least a third of all hospitals in most states, serving as an important point of care in every community. Generally, rural hospitals are less profitable compared to urban hospitals, as they tend to have low patient volumes. This can be due to low and declining populations in rural areas and rural patients bypassing local hospitals, instead opting for treatment by travelling to larger urban clinics with more diverse services. Low revenue generated by low patient volume may lead to hospitals being unable to cover costs; expenses such as building upkeep and maintaining a minimum number of administrative and clinical staff are spread across fewer patients. This also limits the ability of rural hospitals to offer specialized services, as a diverse range of services is most profitable for hospitals.

Since Medicaid’s inception in 1965, it has served as a crucial source of funding for rural hospitals. Medicaid funds rural hospitals through standard fee-for-service (FFS) and managed care payments. Supplemental payments, as part of Medicaid funding from the 2025 budget reconciliation bill, lessen the gap between Medicaid base payments and the cost of providing care. According to several studies, ACA Medicaid expansion has helped improve hospital finances across the country and may especially benefit rural hospitals. This is done by expanding the number of paying patients at hospitals that were previously treating those patients who could not afford to pay. Before expansion, hospitals often provided uncompensated care for individuals who were unable to pay for treatments. Studies show that Medicaid expansion has resulted in improved payer mix, with declines in uninsured patients and/or increases in Medicaid-covered patients. Half of rural hospitals in states that have not yet adopted ACA Medicaid expansion as of 2023 had negative margins, compared to 40% of rural hospitals in expansion states. This benefit is seen most evidently in rural hospitals that see a higher proportion of low-income patients.

Current Updates Under the Administration

The passage of the One Big Beautiful Bill Act, signed into law on July 4th, 2025, is estimated to result in a gross reduction of $990 billion in federal Medicaid and CHIP spending over the next 10 years. One of the main obstacles that divided Republican senators was how cuts to Medicaid would impact rural hospitals, many of which are in states they represent. On average, rural hospitals are predicted to lose 21 cents out of every dollar they receive in Medicaid funding over the next 10 years, resulting in almost $70 billion lost for hospitals in rural areas. Without adequate funding, these hospitals are at increased risk of closure. As part of the One Big Beautiful Bill Act, lawmakers created a $50 billion program called the “Rural Health Transformation Fund” with funding to be allocated to approved states over five years to alleviate financial constraints from Medicaid cuts. Although the temporary funds from the program are all invested into rural health care, it is not expected to be enough to sustain long-term impacts from Medicaid funding cuts. This is because states may choose to use the funds for purposes other than providing payment support to providers. As 2026 progresses, there remains uncertainty in the implementation of the program, not only in the amount of funds given to each state but also whether these funds will provide long-term relief to continue sustaining rural hospitals.