The Medicare-Dependent Hospital (MDH) program provides enhanced Medicare payment to small rural hospitals that depend heavily on Medicare patient volume, supplementing standard Inpatient Prospective Payment System (IPPS) rates.1,2 Like other rural payment designations (e.g., Low-Volume Hospitals (LVH), Sole Community Hospitals (SCH)), the MDH program has lapsed and been retroactively reinstated by Congress. The fiscal year (FY) 2026 IPPS final rule, released in July 2025, confirmed the program would expire on October 1, 2025 without an extension.3 A subsequent continuing resolution (CR) reinstated the program through January 2026, and then again through December 31, 2026.4,5
The MDH program is set to expire again at the end of 2026, against a backdrop of significant fiscal pressure – notably $911B in enacted Federal Medicaid spending reductions over ten years. Unlike prior lapses, the program's renewal is not assured, since merely allowing the MDH and LVH programs to expire would result in an estimated $500M in annual savings to the Medicare program.6,7
Federal payment policy has shifted toward greater fiscal constraint in the current Congress, compounding the longstanding reimbursement challenges rural hospitals face serving older, lower-income and chronically ill populations. The reconciliation package signed in July 2025 reduces the Federal portion of Medicaid spending trajectory by an estimated $911B over ten years through a combination of eligibility restrictions, enhanced verification requirements and changes to Federal matching rates.8 Although the same legislation created the $50B Rural Health Transformation Program (RHTP), distributing $10B annually to states from FY2026 through FY2030, the RHTP funds are explicitly designated for delivery-system innovation (e.g., telehealth, artificial intelligence integration and cybersecurity) rather than direct reimbursement or hospital financial support.9
As a result, rural areas will likely absorb a disproportionate share of these Federal spending reductions, as one in four rural adults is covered by Medicaid, and the estimated rural impact is $137B over ten years if states do not offset the spending cuts.10 The financial challenges of rural hospitals are longstanding, which has manifested in the closure of 143 rural hospitals since 2005 (Figure 1).11 Additionally, nearly 300 rural hospitals are at immediate risk of closing, while more than 700 are considered financially vulnerable to closure.12 Notably, at-risk hospitals are disproportionately concentrated in the South, where one-third of rural hospitals are located.13 As an example, 41% and 37% of rural hospitals are at immediate risk of closure in Alabama and Mississippi, respectively.
Closure is occasionally the inevitable outcome of the convergence of the unique set of issues that rural hospitals face, including suboptimal payer mix from caring for patients who are older, poorer and chronically ill, declining patient volume and uncompensated care and physician recruitment challenges, all of which constrain the capital expenditures necessary to maintain property, plant and equipment.14,15,16 Rural residents have lower rates of private coverage than urban residents, 60.9% and 66.8%, respectively, which is driven primarily by lower rates of employment-based coverage for rural residents (46.6%) compared to urban residents (54.8%) (Figure 2). In turn, rural counties have a higher share of publicly insured residents (45.0%) relative to urban counties (35.6%), with Medicare and Medicaid both more prevalent in rural areas, 24.1% and 20.9%, respectively, compared to 18.4% and 17.2% in urban counties.
Congress established the MDH program in 1987 to support small rural hospitals where at least 60% of inpatient days or discharges are attributed to Medicare patients, an acknowledgement that the standard IPPS rate is insufficient to cover the operating costs of rural hospitals with low patient volumes.17 Since then, Congress has created additional supplemental programs to address this problem – including LVH, SCH and Critical Access Hospitals (CAH).18 Unlike CAH and SCH, which are permanent designations, MDH and LVH status must be periodically reauthorized by Congress, and both have been extended continuously since the 1990s.19 However, per CMS’s FY2027 proposed rule, the MDH program is set to expire on December 31, 2026 absent further Congressional action.20 The possibility that the MDH program will expire at the end of 2026 calls into question whether that loss of funding would meaningfully accelerate closure risk for MDH hospitals.
To compare MDHs with rural and urban hospitals, Hospital Cost Report Information System (HCRIS) 2024 data from the Centers for Medicare and Medicaid Services (CMS) were leveraged to characterize the financial metrics of MDH, rural and urban hospitals together with the FY 2026 IPPS Final Rule Impact File to characterize patient mix.
As defined by IPPS, rural areas are any geographic location outside of an urban area. In this analysis, rural hospitals are inclusive of MDHs. For patient mix, this analysis assessed Medicare days as a share of inpatient days, Medicaid days as a share of inpatient days, the percentage of Disproportionate Share Hospital (DSH) patients and the case mix index (CMI) to assess patient acuity. For financial metrics, this analysis calculated net patient revenue per adjusted discharge and operating profit margins overall. Hospitals with negative total revenue values and operating profit margins below -100% and greater than 100% were excluded from the analysis.
Patient mix and acuity vary meaningfully by hospital designation and rurality. MDHs have the highest percentage of Medicare days as a share of total inpatient days, with a median of 33.5% and an interquartile range (IQR) of 26.9% to 37.5%, followed by rural hospitals at a median of 25.5% and an IQR of 20.0% to 32.4% and urban hospitals at a median of 22.5% and an IQR of 15.9% to 29.2% (Figure 3).
Urban hospitals have a higher share of Medicaid patients, at a median of 22.4% and an IQR of 14.8% to 31.0%, compared with MDHs at a median of 16.3% and an IQR of 12.8% to 21.0%. Urban hospitals show the widest variation in Medicaid share among the three groups. Urban hospitals also have the highest share of DSH patients, with the widest spread at a median of 28.4% and an IQR of 19.4% to 39.4%, compared with 29.1% and an IQR of 23.1% to 35.9% at rural hospitals and 22.3% and an IQR of 17.0% to 31.5% at MDHs.
CMI, a measure of patient diagnostic complexity, where higher values represent more complex cases, varies by hospital designation status and rurality. Urban hospitals have the widest range of CMI, with a median CMI of 1.7 and an IQR of 1.5 to 1.9, while rural hospitals have a median of 1.7 and an IQR of 1.5 to 2.0 and MDHs have a median of 1.4 and an IQR of 1.2 to 1.5 (Figure 4).
Net patient revenue per adjusted discharge measures the average revenue per patient, accounting for both inpatient and outpatient services. MDHs have the lowest net patient revenue per adjusted discharge with a median of $10,257 and an IQR of $7,905 to $12,971, followed by rural hospitals with a median of $13,880 and an IQR of $10,274 to $18,675. Urban hospitals have the widest range of net patient revenue per adjusted discharge, with a median of $13,582 and an IQR of $10,647 to $17,995 (Figure 5).
MDHs have the smallest range of operating margins, with a median of -0.3% and an IQR of -12.2% to 7.7%, followed by rural hospitals with a median of 0.0% and IQR of -8.0% to 8.2% and urban hospitals with a median of 3.9% and an IQR of -7.1% to 14.2% (Figure 6).
The reimbursement characteristics of MDHs and rural hospitals reveal why these hospitals are disproportionately exposed to the potential loss of enhanced Medicare payments. Because Medicare and Medicaid reimburse hospitals at rates that consistently fall below the cost of care, hospitals serving a larger share of Medicare and Medicaid patients generate lower operating margins relative to hospitals with more commercially insured patients.
MDHs, with a median 33.5% of inpatient days attributable to Medicare and the lowest case mix index and net patient revenue per adjusted discharge of any hospital type in this analysis, are, in fact, dependent on Medicare for financial viability. If the MDH program lapses on December 31, 2026, MDHs will lose the funding mechanism that allows many of them to maintain financial viability. Without some substitute form of subsidy, it is logical to think that some MDHs might close.
From a policy perspective, it is difficult to reconcile eliminating the MDH program for hospitals without any alternative funding source at the same time that CMS permits more than 400 geographically urban hospitals to access incremental funding through an “administratively rural” designation. The share of dually classified hospitals – geographically urban, administratively rural hospitals – grew from 13% to 45% between 2013 and 2023.
Geographically urban, administratively rural hospitals have a median overall operating margin of 1.3%, above the 0.0% median for hospitals that are both geographically and administratively rural, and closer to the 3.9% median for hospitals that are both geographically and administratively urban. For facilities to generate incremental payments intended for rural hospitals in any scenario raises questions for policymakers, particularly when those payments threaten the very existence of the rural hospitals for which they were intended.
The fact that nearly 150 rural hospitals have closed since 2005 suggests that Congress has consistently appropriated too little to the MDH program. As such, it seems likely that additional rural hospitals will close if Congress allows MDH to lapse entirely. Hospital closures of this kind rarely occur alone – the loss of inpatient capacity in a rural community has historically preceded the withdrawal of emergency, obstetric and primary care services from the surrounding area, compounding an already strained rural physician workforce that has fewer nearby facilities to support it.21,22 If the MDH program permanently lapses on December 31, 2026, the hospitals with the least margin to absorb that loss – the same hospitals the program was created to protect – will be most at risk for closure, leaving already vulnerable rural communities with reduced access to not just inpatient care, but the broader continuum of services that depend on a functioning local hospital.
Healthcare access gaps in poor, low-density communities are not new and have rarely been solved by payment-rate adjustments alone – sustainable solutions have historically required direct investment in physical infrastructure.23 Viewed through this lens, the MDH program's enhanced payment is best understood as a temporary stopgap that has kept operating margins from falling further, not as a structural fix for the capital and workforce constraints underlying rural hospital fragility.24 Its expiration would remove a meaningful piece of that stopgap, at a moment when other Federal policy changes are moving in the same direction rather than offsetting it.
The findings in this analysis point to a structural problem that a payment-rate extension alone cannot solve: even with the MDH program’s enhanced payment in place, MDHs operate at a near breakeven margin of -0.3%. In 1946, President Truman signed the Hill-Burton Act, providing grants and loans to hospitals subject to an agreement to treat patients without regard to their ability to pay. Congress could revive this approach with a 2026 Hill-Burton Act, shifting the mechanism from payment-rate support to direct capital investment in modern ambulatory facilities equipped for interventional medicine and digital health. Such facilities would carry an EMTALA-style obligation to treat patients regardless of ability to pay, paired with disproportionate share-style support to underwrite the cost of uninsured care. Such facilities could replace critical access hospitals and federally qualified centers in the communities MDHs serve, addressing the capital constraint that a reauthorized MDH program, on its own, was never designed to fix.