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The one-year anniversary of the One Big Beautiful Bill Act has renewed attention to the financial stability of rural hospitals. But structural forces tied to the Medicare Wage Index rural hospitals depend on for reimbursement predate the law by decades, and remain among the most significant drivers of rural healthcare instability today.
The Scale of Rural Hospital Closures
More than 180 rural hospitals have closed since 2010, further narrowing rural patients’ access to critical healthcare providers, including OB/GYNs and primary care doctors, compared with their urban counterparts. Heavy consolidation of hospital and insurance markets, meanwhile, combines with low patient volumes and inadequate federal reimbursement structures to erode already thin operating margins and push facilities to cut services or close altogether. More than one-third of currently operating rural hospitals are at risk of closing.
Why Addressing Funding Structures Matters
Addressing these funding issues is crucial to maintain services and expand healthcare access for rural patients, and a good place to start is with the federal reimbursement policy at the core of this problem: the Medicare Wage Index rural hospitals rely on for their base payment rates.
How the Medicare Wage Index Rural Hospitals Formula Works
The Medicare Wage Index, or MWI, is an adjustment to Medicare reimbursement rates that standardizes payments to hospitals. Based on local and geographic differences in labor costs, the index plays a key role in determining reimbursement rates that can make or break a hospital’s ability to hire staff, stay open, and serve its community. The principle is that because urban hospitals often pay more, they should receive higher Medicare reimbursements.
A Self-Reinforcing Cycle
Yet it’s one more factor driving the cycle of low pay, tight margins, and limited ability to recruit and retain providers, forcing even lower index values and driving the cycle faster. The system adjusts Inpatient Prospective Payment System rates using Core-Based Statistical Areas, comparing each area’s average hourly pay with the national average; areas above the national average receive higher reimbursement rates, while those below receive lower rates.
How the Medicare Wage Index Rural Hospitals Formula Shapes Treatment Access
Because the MWI shapes a hospital’s reimbursement, it also influences the procedures a hospital can afford to offer patients. A 2022 study by the American Journal of Managed Care found that regions with an index half the national mean recorded 35% fewer device-intensive procedures, while regions with an index 50% higher than the national mean recorded 52% more such procedures.
A Widening Specialist Shortage
Research by the American College of Cardiology found that 83% of rural counties had no cardiologist. The Journal of Rural Health found similar trends for anesthesiology and general surgery: 55.1% of rural counties lacked a surgeon and 81.2% lacked an anesthesiologist, underscoring how deeply the Medicare Wage Index rural hospitals depend on connects to specialist care access.
Exceptions That Distort the Medicare Wage Index Rural Hospitals Rely On
The MWI allows exceptions for hospitals to receive a higher rate than their local data would otherwise produce, including floors for rural or frontier locations and adjustments for health professional outmigration. In 2022, over 66% of hospitals used at least one exception, making them the norm rather than the exception. Since the index is budget-neutral, every upward adjustment for hospitals that secure an exception is offset by lower payments to other hospitals, often nearby, shifting money around arbitrarily rather than directing support to where it’s most needed.
Regional Boundaries That Mask Local Variation
First, the use of regional boundaries to define economic markets masks variation in relative labor costs within a region, meaning hospitals with different actual costs receive the same index value if located in the same statistical area. Variable allocations between neighboring statistical areas can also create reimbursement cliffs, severe drops in funding from one region to the next, leading to provider outflow toward higher-paying nonrural employers.
The Reclassification Loophole in the Medicare Wage Index Rural Hospitals Face
The plethora of exceptions exacerbates inequities by allowing hospitals to gain non-index-related benefits. Using the reclassification exception, more than 425 urban hospitals recategorized themselves as rural between 2017 and 2023, gaining rural designation benefits and Medicare-funded residency slots before often reverting to their original high-reimbursement classification.
Alabama’s Particular Vulnerability
Alabama faces one of the lowest MWI values in the country, with 42% of its population living in rural areas. Alabama hospitals cannot exploit the reclassification maneuver because the 35-mile rule requires a qualifying higher-paying labor market nearby, and Alabama’s sparse rural geography means few such markets exist. When higher-reimbursement urban hospitals temporarily reclassify into Alabama’s rural areas and then revert, they distort the calculations Alabama’s genuinely rural hospitals are measured against, leaving them with a lower relative index and diminished capacity to recruit staff. Along the coast Alabama shares with Florida, the Infirmary Health System loses providers to Pensacola hospitals, where they can earn $5 more per hour due to Florida’s higher index value.
Proposed Fixes for the Medicare Wage Index Rural Hospitals Depend On
Senators Marsha Blackburn, R-Tennessee, and Mark Warner, D-Virginia, recently introduced legislation to partially address this dynamic by codifying an index floor for the lowest-paid hospitals, boosting reimbursements for facilities below the 25th percentile. The bill, the Save Struggling Hospitals Act, would reduce some of the damage caused by low rates for rural hospitals, but not the structural reforms needed for durable long-term solutions.
MedPAC’s Recommended Structural Reforms
Policymakers have a few options to address these structural flaws, all recommended by the nonpartisan Medicare Payment Advisory Commission: shifting the underlying data source from hospital-only cost reports to broader Bureau of Labor Statistics or Census Bureau data; adopting a smoothed index that gradually blends values across neighboring regions and caps reimbursement cliffs at 10%; and replacing exceptions with a better base formula that reduces gaming and restores the index’s original purpose.
What Comes Next for the Medicare Wage Index Rural Hospitals Need Reformed
The MWI aims to adjust hospital reimbursement to overcome regional and geographic differences in labor costs. However, its quirks, flaws, and susceptibility to manipulation hurt those who most depend on it: rural healthcare facilities, providers, and patients, forming a vicious cycle in which every rotation deepens their disadvantage and widens the gap between the healthcare haves and have-nots.
A Formula That Compounds the Problem It Was Meant to Solve
The irony is that the Medicare Wage Index rural hospitals rely on compounds the very problems it was created to address. Congress has the opportunity, and the policy options laid out by MedPAC, to correct a formula that has long disadvantaged the hospitals and communities that need support the most.
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