The rapid growth of urban hospitals claiming “administratively rural” status within Medicare is yet another example of how well-intentioned policies unintentionally create loopholes for private players to exploit. As a consequence, healthcare markets are being distorted, prices are rising, and American patients and taxpayers are being compromised.

Following two federal court rulings, the Centers for Medicare & Medicaid Services changed its rules in 2016 to allow urban hospitals to pair Section 401 reclassification with a subsequent Geographic Classification Review Board reclassification. Suddenly, many urban hospitals, especially the large ones, could dual-classify as “urban” and “rural.”

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At first glance, this might appear to be mere semantics. However, it opened a loophole in practice that transformed well-intended rural support programs into profit centers for large urban hospitals.

Many were quick to take advantage. The number of urban hospitals that obtained dual classification exploded from just three in 2017 to 425 in 2023. The arrangement allowed urban hospitals to simultaneously harvest the high urban wage index for Medicare payment rates while qualifying for rural-only perks, including bonus reimbursement policies and expanded graduate medical education slots. 

The most lucrative way hospitals have leveraged dual classification is through easier access to the 340B Drug Pricing Program. This federal program allows qualifying hospitals to buy medications from drug companies at steep, government-mandated discounts and then bill patients, employers, insurers, Medicare, or Medicaid at full price. Hospitals then pocket the difference, using the revenue however they want without any oversight.

Well-heeled urban hospitals obtain dual classification (as rural referral centers, or RRCs) by meeting a minimum bed count, a veritable guarantee in densely populated urban areas. This status allows them to exploit a lower disadvantaged patient-mix threshold (dropping from 11% to 8%) to qualify for 340B eligibility. That lower bar was originally designed to help large regional hospitals actually serve rural patients.

From 2017 to 2022, drug purchases by RRCs under the 340B program jumped 405%, reaching $1.3 billion. That’s more than the combined purchases of the two other types of rural hospitals — critical access hospitals and sole community hospitals. Evidence from the Minnesota Department of Health made clear that larger, urban hospitals earn far more profit from each 340B prescription filled than their smaller, geographically rural counterparts.

Even worse, urban hospitals gain a competitive advantage through the 340B program over other hospitals and independent physician practices, accelerating the consolidation of the hospital market, driving up prices, and undermining the very patient access that the 340B program was designed to promote.

The recent historic $50 billion federal investment in rural hospitals, embedded in the “one big, beautiful bill,” only magnifies the stakes in this gaming of rural designations. If left unchecked, dual classification could channel rural health taxpayer dollars toward large urban medical centers, diverting them from rural America, where healthcare access is limited and many small-town hospitals have closed or are reportedly at risk.

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Congress and the Trump administration must work together to restore integrity to rural health policy. Reform should ensure that only genuinely rural hospitals, serving genuinely rural patients, benefit from programs tailored to their unique challenges. Even better, at least some rural health dollars should flow directly to patients, not to facilities. This approach would generate bottom-up, patient-driven innovation in care delivery that truly benefits rural Americans.   

Taxpayer subsidies aimed at supporting rural health should be determined by geographic reality, not administrative sleight of hand. Policymakers must close the dual-classification loophole and spend taxpayer dollars with precision and transparency. Rural health resources must empower rural Americans, not underwrite the expansion of urban hospital profit margins.

Ge Bai is a professor of accounting and health policy at Johns Hopkins University and is the senior author of the new study, “Health Affairs: Sharp Rise In Urban Hospitals With Rural Status In Medicare, 2017–23.” 

Joe Grogan is a senior visiting scholar at the University of Southern California’s Schaeffer Institute. He served as a domestic policy adviser during the first Trump administration.