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Rural Health Information Hub

Rural Healthcare Payment and Reimbursement

The financial viability of rural healthcare facilities depends on payment for healthcare services provided. Payers for these services include government programs such as Medicare and Medicaid, commercial health insurers, and patients paying directly for their own care, among others. The payment policies of federal and state government programs can affect the ability of rural facilities to remain open.

This guide describes the contribution different payers make to rural healthcare, payment systems and related facility types in rural areas, and how payment policies impact rural facilities' financial sustainability. In addition, the guide discusses how the healthcare system's transition from paying for volume to paying for value is impacting rural healthcare providers.

Frequently Asked Questions

What sources do rural healthcare facilities receive payment from?

Payments for providing healthcare services to patients come from different sources, depending on how (and if) each patient is covered by health insurance. Payers include:

  • Original Medicare: The federal health insurance program for people 65 years of age and older, people under age 65 with certain disabilities, and patients with End-Stage Renal Disease or Amyotrophic Lateral Sclerosis (ALS). In general, Medicare Part A covers inpatient care in hospitals, including Critical Access Hospitals and Skilled Nursing Facilities, hospice care, and some home healthcare services. Medicare Part B covers physician services and outpatient care, and most beneficiaries must pay a monthly premium. Medicare prescription drug coverage, or Medicare Part D, is available to everyone with Medicare but requires a monthly premium.
  • Medicare Advantage: Private plans approved by the Centers for Medicare & Medicaid Services (CMS) to cover participants' Medicare Part A and B benefits. Medicare pays the companies that offer these plans a set rate each month for each beneficiary. Medicare Advantage plans, also called Medicare Part C, may offer supplemental benefits that are not included under Medicare Parts A and B, such as vision or dental benefits.
  • Medicaid and the Children's Health Insurance Program (CHIP): A federal-state partnership to provide health insurance to eligible low-income people, families and children, pregnant women, the elderly, and people with disabilities. Each state designs its Medicaid program within federal guidelines. As of July 2021, 41 states have contracted with managed care programs to provide Medicaid services for some of their beneficiaries. CHIP provides low-cost healthcare coverage to children in families that earn too much to enroll in Medicaid.
  • Indian Health Service: The healthcare system for members of federally recognized American Indian and Alaska Native tribes. However, IHS does not provide healthcare insurance.
  • TRICARE: The healthcare insurance program for uniformed service members, retirees, and their families.
  • Veterans Health Administration (VHA): The Veterans Health Administration (VHA) operates the healthcare benefits insurance program for U.S. veterans. There are a variety of eligibility requirements depending on the type of healthcare sought and the status of the service member. Veterans with VHA insurance can receive care at U.S. Department of Veterans Affairs facilities or through community healthcare providers that partnered with the VHA and provide services to rural veterans.
  • Private/commercial health insurers, such as through employer-sponsored plans or insurance purchased individually. Even when using private health insurers, patients are often required to pay a portion of the bill through a copay, coinsurance, or deductible.
  • The patient (self-pay): When the patient pays for their healthcare directly without using third-party health insurance.

Some patients may be covered by multiple sources, such as Medicare and a private supplemental plan or be dual-eligible for Medicare and Medicaid. Rural healthcare facilities often have a higher proportion of payments coming from public sources.

The American Hospital Association's 2019 Rural Report details how rural hospitals are more likely to serve a higher proportion of patients on Medicare and Medicaid. According to this report, in 2017, Medicare and Medicaid comprised 56% of rural hospitals' revenue, underscoring their vulnerability to changes in Medicare and Medicaid payment policies. In addition, Capital Link's Rural Federally Qualified Health Centers Financial and Operational Performance Analysis 2018-2021 describes the median payer mix for rural Federally Qualified Health Centers (FQHCs) between 2018-2021. This report also highlights that while rural FQHCs received a lower percentage of patient revenue from Medicaid compared to urban FQHCs in 2021, rural FQHCs received a greater share of payment from Medicare.

What are the common rural healthcare facility types?

Due to the low volume of services provided, many rural providers struggle to remain financially viable under traditional Medicare payment systems for hospitals and clinicians. As a solution, several types of special rural designations have been created:

Outpatient facility designations

  • Federally Qualified Health Center (FQHC)
    FQHCs are HRSA Health Center Program award recipients and look-alikes that are certified by CMS and typically receive grant funding under Section 330 of the Public Health Service Act or meet the requirements of the program. As an FQHC, health centers can receive reimbursement from Medicare under a Prospective Payment System (PPS) and from Medicaid under the Prospective Payment System (PPS) or other state-approved Alternative Payment Methodology (APM). While not a rural-specific designation, FQHCs are important safety net providers for rural communities. See the Federally Qualified Health Centers topic guide for more about this facility type.
  • Rural Health Clinic (RHC)
    RHCs are designated by CMS. They must be located in a rural area that is also medically underserved or a Health Professional Shortage Area (HPSA). RHCs are required by CMS to be staffed by at least one nurse practitioner (NP) or physician assistant (PA), and an NP, PA, or certified nurse midwife (CNM) who must be on site at least 50 percent of the time in operation. RHCs receive Medicare payment on a cost-related basis through an All-Inclusive Rate (AIR) subject to certain upper payment limits or caps for outpatient physician and certain non-physician services. See the Rural Health Clinics topic guide for more about this facility type.

Inpatient facility designations

  • Critical Access Hospital (CAH)
    Rural hospitals maintaining no more than 25 acute care beds. CAHs must be located at least 35 miles, or 15 miles by mountainous terrain or secondary roads, from the nearest hospital — unless designated as a “Necessary Provider” by a state plan prior to 2006. Unlike hospitals paid prospectively using diagnosis related groups, CAHs are reimbursed based on the hospital's allowable costs. Each CAH receives 101 percent of the Medicare share of its allowable costs for outpatient, inpatient, laboratory, therapy services, and post-acute swing bed services. See the Critical Access Hospitals topic guide for more about this facility type.
  • Disproportionate Share Hospital (DSH)
    A special reimbursement designation under Medicare and Medicaid designed to support hospitals that provide care to a disproportionate number of low-income patients. Medicare and Medicaid have distinct DSH programs. According to the Medicaid and CHIP Payment and Access Commission, while states are required to make DSH payments to hospitals that serve a high proportion of Medicaid beneficiaries and other low-income patients, these payments are limited by annual federal allotments and states have flexibility in determining how DSH payments are calculated and which hospitals receive these payments. Although not a rural-specific designation, the DSH designation allows some rural facilities to remain financially viable.
  • Medicare-Dependent Hospital (MDH)
    A designation that provides enhanced payment to support small rural hospitals with 100 or fewer beds for which Medicare patients make up at least 60% of the hospital's inpatient days or discharges. This designation is not available to rural hospitals already classified as a Sole Community Hospital, discussed below. See “Payment Adjustments” under the Acute Care Hospital Inpatient Prospective Payment System section of the Medicare Learning Network: Medicare Payment Systems website for more information about this designation.
  • Low-Volume Hospital (LVH)
    A designation for hospitals with fewer than 3,800 patient discharges in the previous year which are more than 15 miles from the nearest Inpatient Prospective Payment System (IPPS) acute care hospital. Qualifying hospitals receive a payment adjustment up to an additional 25% for every Medicare patient discharge. See “Payment Adjustments” under the Acute Care Hospital Inpatient Prospective Payment System section of the Medicare Learning Network: Medicare Payment Systems website for more information about this designation.
  • Rural Referral Center (RRC)
    Rural or urban tertiary hospitals that generally receive referrals from surrounding rural acute care hospitals. Any acute care hospital can be classified for Medicare purposes as an RRC if it meets one of several qualifying criteria based on location, bed size, and/or referral patterns. Some RRCs may also be Sole Community Hospitals or Medicare-Dependent Hospitals. See “Payment Adjustments” under the Acute Care Hospital Inpatient Prospective Payment System section of the Medicare Learning Network: Medicare Payment Systems website for more information about this designation.
  • Sole Community Hospital (SCH)
    A designation based on a hospital's distance in relation to other hospitals, indicating that the facility is the only short-term, acute care hospital serving a community. Distance requirements vary depending on whether a facility is rural and how inaccessible a region is due to weather, topography, and other factors. SCHs also receive an adjustment of 7.1% above the Outpatient Prospective Payment System rate for outpatient services excluding drugs and biologics. See “Payment Adjustments” under the Acute Care Hospital Inpatient Prospective Payment System section of the Medicare Learning Network: Medicare Payment Systems website for more information about this designation.

Medicare is also an important payer for other healthcare providers and facilities in rural areas, including home health agencies, hospice, skilled nursing facilities, and others. For more information about these and other providers and designations, refer to the Centers for Medicare & Medicaid Services website.

How does payment policy impact rural healthcare facilities and providers?

Rural providers are often more reliant on Medicare and Medicaid payments than urban providers. According to the 2018-2022 American Community Survey 5-year estimates, 19.8% of rural residents are 65 years old and older and therefore eligible for Medicare coverage. In addition, the Medicaid and Rural Health issue brief notes that nearly 25% of rural residents under 65 are covered by Medicaid. As a result, changes to payment policy can significantly impact rural providers. For example, Medicare reimburses Critical Access Hospitals at 101% of allowed costs. However, as of April 1, 2013, all Medicare reimbursement is subject to a 2% reduction due to sequestration. Estimate of Federal Payment Reductions to Hospitals Following the ACA 2010-2028: Estimates and Methodology examines the impact of sequestration, changes in Medicare payments for bad debt, and other legislation affecting reimbursement.

Federal payment policy can increase rural providers' ability to provide reimbursable services. In response to the COVID-19 pandemic, the Centers for Medicare & Medicaid Services (CMS) changed reimbursement requirements to allow providers to expand the use of telehealth services. In addition, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law on March 27, 2020, allowed FQHCs and RHCs to furnish distant site telehealth services to Medicare patients at any location for the duration of the COVID-19 public health emergency. According to Rural Federally Qualified Health Centers Financial and Operational Performance Analysis 2017-2020, rural FQHCs conducted 5.8 million visits via telehealth in 2020 compared to 500,000 in 2019.

For a broader look at the rural health policymaking process, see the Rural Health Policy topic guide.

How does payment policy impact which services are available in rural areas?

The swing bed program is an example of payment policy designed to address access to care in rural areas. A swing bed is a bed that can be used for either acute care or post-acute care that is equivalent to skilled nursing facility (SNF) care. The Centers for Medicare & Medicaid Services approves CAHs and other rural acute care hospitals to furnish swing beds, which gives the facility flexibility to use beds, as needed, to provide either acute or skilled nursing facility-level care. This flexibility provides facilities with swing bed agreements the ability to meet unpredictable demands for acute care and SNF care. Medicare pays rural hospitals for skilled nursing facility (SNF)-level services under the SNF Prospective Payment System (PPS), while CAHs are exempt from the SNF PPS and instead receive 101% of the reasonable cost of SNF services. For more information on swing beds, see the Medicare Learning Network: Swing Bed Services fact sheet and the What is a swing bed? section of the Critical Access Hospitals topic guide.

The Balanced Budget Act of 2018 created an add-on payment increase specifically for home health episodes provided in rural areas to address the financial pressures in low-use areas. As outlined in the 2019 Medicare Payment Advisory Commission (MedPAC) Report to Congress, home health services provided in high-utilization rural counties received a 1.5% add-on in 2019, and 0.5% in 2020. Low-population rural counties received an add-on payment of 4% in 2019 that decreased by 1% each year through 2022. The Consolidated Appropriations Act, 2023, authorized a 1% add-on payment to continue in these counties through 2023. All other rural counties received an add-on payment of 3% in 2019 that decreased by 1% each year through 2021.

While community health workers (CHWs) provide a range of services to improve a rural community's health and social needs, few formal payment mechanisms exist for these services. Due to the limited funding and payment mechanisms for CHW services, one of the most common challenges for these programs is financial sustainability. Medicaid Coverage of Community Health Worker Services notes that although states can provide payment for CHW services through a Section 1115 demonstration authority, Medicaid coverage for these services is limited, with 21 states authorizing payment for CHW services through Medicaid. State Community Health Worker Policies provides an overview of CHW models, including Medicaid reimbursement and other financing mechanisms, by state. Implementing and Sustaining Rural Community Paramedicine notes similar challenges to funding and sustaining rural community paramedicine programs.

How are rural healthcare providers reimbursed? Which healthcare providers are reimbursed through each method?

There are many different payment methods currently or historically used by the U.S. healthcare system. The following provides an overview of the different models and the advantages and disadvantages of each model as they relate to the payment of rural healthcare providers.

Reasonable and customary

Payment Methods and Benefit Designs: How They Work and How They Work Together to Improve Health Care explains that before the implementation of the prospective payment system in 1992, Medicare based its payments to providers on the fees customarily charged by the provider in the previous year and the prevailing charges for the service in the geographic area. According to The Medicare Physician Fee Schedule Likely To Serve as Foundation for Alternative Payment Models, despite implementing a policy to limit uncontrolled growth in costs, this system continued to incentivize increasing prices and resulted in a wide variation in the payment rates for the same services.

Pros Cons Examples

Memorializes historic payments

Typically based on historic costs and or charges

Not necessarily linked to current costs

Perpetuates payment disparities

No explicit cost controls

Medicare payment prior to Prospective Payment System and Physician Fee Schedule implementation


Like the name implies, fee-for-service payment models pay physicians, hospitals, and other healthcare providers for individual services as they are provided. Several payment models, including prospective payment systems and shared savings models, are built upon the fee-for-service model. Critics of this model argue that fee-for-service payment rewards providers for the volume of healthcare provided rather than the quality of care delivered or healthcare outcomes.

Medicare fee-for-services payment rates for specific payment systems outlined by law — such as the Medicare Physician Fee Schedule Payment (MPFS or PFS) and Hospital Outpatient Prospective Payment System (OPPS), among others — are set by the Centers for Medicare & Medicaid Services and are updated annually through regulations. State Medicaid programs operating under a fee-for-service model likewise set the payment rates. According to the Medicaid and CHIP Payment and Access Commission, Medicaid fee-for-service rates are often much lower than the rates of other payers.

Pros Cons Examples

Incentivizes provider productivity and care delivery

Provides flexibility across various provider types and sizes

Straightforwardly understood by providers and managed by accounting systems

Incentivizes delivery of discrete services regardless of clinical or cost outcomes

No incentives to discourage inefficient or unnecessary care

Limits consideration of care coordination and alternate care methods that are not paid as discrete services or are paid at a lesser price

May increase patient inconvenience if more convenient alternate care is not available

Medicare Physician Fee Schedule

Prospective payment system (PPS)

Prospective payment systems (PPS) are a type of fee-for-service payment methods of reimbursement in which providers are paid a pre-determined, fixed amount. The amount paid is based on a classification scheme such as diagnosis-related groups (DRGs) for acute care hospital inpatient PPS or ambulatory payment classification (APC) groups in the outpatient PPS. Payment rates under PPS systems typically have a base rate for each service under the classification scheme and adjusted to account for geographic differences.

Medicare Payment Systems provides information about Medicare payment systems, including the Skilled Nursing Facility PPS (SNF PPS), Home Health PPS, Inpatient Rehabilitation Facility Prospective Payment System (IRF PPS), and more.

Pros Cons Examples

Incentivizes less resource utilization per episode of care by one provider

Reduces episodic cost of care by one provider

Encourages rapid turnover of patients between episodes of care

Requires complex episode-of-care coding to ensure proper patient risk consideration during payment

Medicare Inpatient PPS

Cost-based reimbursement (CBR)

Unlike providers that receive payment under prospective payment systems, facilities that receive cost-based reimbursement (CBR) are not paid based on the types or number of services provided or the number of services but on the actual cost of the service provided as documented on facility-prepared cost reports. As a result, CBR is a retrospective fee-for-service payment system.

Critical Access Hospitals (CAHs) receive cost-based reimbursement from Medicare. According to the Medicare Payment Advisory Commission's Payment Basics: Critical Access Hospitals Payment System, Medicare pays CAHs 101 percent of the reasonable costs for most outpatient and inpatient, laboratory, and therapy services, as well as swing bed post-acute care. These costs are determined by a CMS cost accounting methodology that allocates costs among patients based on the number of days a patient stays in the hospital and the dollar value of charges the patient incurs for ancillary services. See the Critical Access Hospitals topic guide for more about this facility type.

Pros Cons Examples

Payment based on hospital-prepared cost reports

Limits financial losses on care provided

Cost reports may not be accurate and are expensive to prepare

CBR is nominally unprofitable

Medicare Critical Access Hospitals payments

Pay-for-performance adjustments

Pay-for-performance models, one of several value-based payment models, link hospital, physician, and other healthcare provider payments to performance on quality and efficiency benchmarks, including healthcare outcomes, best practices, and patient satisfaction. Pay-for-performance models aim to incentivize high-quality and efficient care delivery instead of the volume of care delivery. The Hospital Readmission Reduction Program (HRRP) was developed to reduce avoidable readmissions for six conditions and procedures by promoting communication and care coordination to better involve patients and caregivers in the development of discharge plans.

The Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) required CMS to establish a quality-based incentive payment program for clinicians. The resulting Quality Payment Program (QPP) offers clinicians two tracks: the Merit-based Incentive Payment System (MIPS) and Advanced Alternative Payment Models (APMs). Under the MIPS program, healthcare providers bill Medicare through the appropriate fee-for-service or prospective payment system and receive a negative, neutral, or positive payment adjustment based on performance related to quality and cost of the patient care, improvements to clinical care processes and patient engagement, and the use of certified electronic health record technology (CEHRT). Clinicians and practices that meet a low-volume threshold are not required to participate in MIPS. Additionally, CMS has specific requirements and flexibilities for clinicians in small practices and practices in rural, underserved, and Health Professional Shortage Areas. For more information, visit the Quality Payment Program website.

Pros Cons Examples

Depending on program, incentivizes improved quality of care and/or efficient care

Enhances provider collaboration

May reduce revenue dependency on FFS

Selected measures for performance improvement do not recognize complexity of patient care

Single measure performance improvement may encourage avoidance of high-risk patients

Focus on attaining performance standards decreases attention to patient care

Hospital Readmission Reduction Program; Medicare Hospital Value-Based Purchasing Program

Shared savings

Shared savings payment models measure healthcare provider performance against quality and spending targets. Providers typically continue to receive a base payment rate through existing methods, such as fee-for-service. According to Payment Methods and Benefit Designs: How They Work and How They Work Together to Improve Health Care, shared savings models have been seen as transitional payment models to allow healthcare providers to receive incentives for reducing healthcare spending and gain experience assuming risk for healthcare costs. Shared savings models can be one-sided or two-sided. In one-sided shared savings models, providers initially bill Medicare through the appropriate fee-for-service structure but can also receive additional payments if they meet or surpass certain quality and cost targets. In two-sided, or shared-risk, models, providers can receive these additional payments if they meet or exceed these targets but can also be penalized for not meeting quality or cost goals.

Shared savings is commonly associated with the Medicare Shared Savings Program (SSP). SSP is a voluntary program that encourages groups of doctors, hospitals, and other healthcare providers and suppliers to form Accountable Care Organizations (ACOs) to provide coordinated, high-quality care to their Medicare beneficiaries. ACOs agree to assume responsibility for the quality, cost, and experience of care for their assigned Medicare fee-for-service (FFS) beneficiary population. Different ACO tracks are available for ACOs to accept different levels of risk.

Pros Cons Examples

May improve clinical quality and reduce cost of care

May reduce revenue dependency on FFS though additional payments if benchmarks are met or exceeded

Encourages care coordination within the healthcare system and with community-based organizations

Encourages utilization of high-quality and low-cost providers

Required infrastructure for success (e.g., population-health and financial risk-management processes) is costly

Increases administrative costs

Care providers that are not part of the system may reduce potential shared savings

Performance improvement measures may not recognize complexity of patient care

Medicare Shared Savings Program; Vermont All-Payer Accountable Care Organization (ACO) Model

Reference pricing

Reference pricing is a consumer-oriented insurance policy design that aims to encourage plan beneficiaries to “shop” for care based on price. The Altarum Healthcare Value Hub explains that under reference pricing, insurers set a price for a drug, service, or procedure. Beneficiaries can select a provider that charges more than the reference price but are then responsible for paying the difference. Providers are therefore also incentivized to lower costs and increase quality to attract patients.

In 2011, the California Public Employees Retirement System (CalPERS) implemented a reference pricing system for total hip or knee replacement surgery for its self-insured preferred provider organization (PPO) health plans. CalPERS placed an upper limit of $30,000 on its payments for inpatient facility charges related to a total hip or knee replacement. Patients who chose to receive care from facilities that charged more than $30,000 would be responsible for the difference. According to a 2019 study, CalPERS saw a 19% increase in beneficiaries selecting lower-cost hospitals in the first two years after implementing reference pricing.

Pros Cons Examples

Enhances provider collaboration and coordination

Incentivizes efficient care

Price may be set below cost of care requiring higher prices for other services

Focus on one service may decrease attention to other services

CalPERS reference-based pricing design for hip and knee replacements

Bundled payment

Bundled payments are fixed payments that cover a set of services or treatments a patient receives during a specific period of care or procedure. The goal of bundled payments is to incentivize coordinated, efficient, high-quality care while also reducing healthcare costs. Providers participating in a bundled payment model receive a single payment for all services in each episode of care and share in the savings or losses based on how effectively and efficiently the care is delivered. Bundled payments can be prospectively set or retrospectively assessed against predetermined target rates at the end of a performance year. These rates are based on the expected costs of all items and services provided during the episode.

The Bundled Payments for Care Improvement Advanced (BPCI Advanced) Model, for example, covers 8 clinical episode groups from the start of a patient's inpatient hospital stay or outpatient procedure through 90 days post-discharge. Services included in a clinical episode include physician services, inpatient rehabilitation services, home health services, clinical laboratory services, Medicare Part B drugs, and more. CMS provides participating providers with target prices before each payment year. At the end the performance period year, CMS reconciles the actual healthcare expenditures for the episode against the target price. Providers may receive an additional payment from CMS if actual charges were lower than the targets. However, if actual charges during the performance period were higher than the target prices, providers may be required to make a repayment to CMS.

Pros Cons Examples

Enhances provider collaboration and coordination

Incentivizes efficient care

Defining care within an episode of care may be difficult

Price may be set below cost of care requiring higher prices for other services

Focus on one service may decrease attention to other services

May encourage avoidance of high-risk patients

Medicare Bundled Payments for Care Improvement Initiative

All-payer rate setting

Hospitals typically negotiate payment rates with each payer. In a traditional hospital rate setting system, a state agency or other state-level authority establishes payment rates for hospital services that apply to multiple payers. All-payer rate setting is an extension of this in which every payer in the state pays the same uniform rate for services. All-payer rate setting requires a waiver from the Centers for Medicare & Medicaid Services (CMS) and often requires the rates to not be higher than what Medicare would usually pay under usual rules.

From January 2014-December 2018, hospitals in Maryland operated under the Maryland All-Payer Model (MDAPM). Maryland has a decades-old waiver to exempt Maryland hospitals from the CMS Inpatient and Outpatient Prospective Payment Systems (PPS). Under the scope of this waiver and the MDAPM, all third-party payers paid uniform rates for inpatient and outpatient services with the goal of limiting per capita total hospital cost growth for all payers, including Medicare, and generate $330 million in Medicare savings over 5 years. The Maryland All-Payer Model - Final Evaluation Report notes that total Medicare expenditures declined by 2.8% during the model period and hospital expenditures declined by 4.1%. Medicare also experienced a 17.2% reduction in outpatient department expenditures. MDAPM reduced hospital expenditures for commercial plan members and also decreased hospital admissions and potentially avoidable hospitalizations. This model was succeded by the Maryland Total Cost of Care Model in 2019.

Pros Cons Examples

Eliminates cost-shifting

Prices are more transparent and less confusing to patients

Disallows pricing competition

Difficult to implement in a pluralistic payer environment

All third-party payers operating in Maryland

Global budget

Global budgeting is a payment model in which hospitals and other healthcare providers are paid a predetermined, fixed amount to cover all services rendered for a given period of time. Providers assume responsibility for all charges beyond the set amount, encouraging efficient healthcare and reducing unnecessary healthcare utilization. According to the Commonwealth Fund, global budgets may also encourage hospitals and other healthcare providers to invest in initiatives to improve the social determinants of health to improve population health and reduce utilization of expensive healthcare services. Hospitals and providers under a global budget model may choose to reinvest any surplus payments back into local population health and social support initiatives.

The Pennsylvania Rural Health Model is an example of a global budget model. A budget for each participating rural hospital is set for inpatient and outpatient services based on “hospitals' historical net revenue for inpatient and outpatient hospital-based services from all participating payers.”

Pros Cons Examples

Providers protected from monetary loss if service volume decreases

Incentivizes efficient care

Potentially reduces cost of care

Encourages care coordination within the healthcare system and with community-based organizations

Potentially redirects care from low-value services to needed services not previously paid

Providers at financial risk if service volume increases

Defining services to be included in the global budget is difficult

Defining service volume changes out of the provider's control is difficult

Determining changes to the global budget is difficult

Risks payers paying prices beyond the cost of production

Pennsylvania Rural Health Model


According to Altarum's Healthcare Value Hub, capitation is “an alternative payment model in which healthcare providers are paid a fixed rate per person…to cover all care within a specified scope of services plus administrative costs, regardless of the number of services they provide” over a given period of time. Providers who deliver care for less than the fixed rate can share in the savings, while providers whose care costs more than the capitated rate are responsible to pay the difference, thus incentivizing efficient care delivery. Like pay-for-performance and other value-based care payment models, payers often link payments to quality and patient outcome measures.

The Accountable Care Organization Realizing Equity, Access, and Community Health (ACO REACH) Model is an example of capitated payments being tested in rural communities. Among other things, the ACO REACH Model provides a risk-adjusted monthly payment for services from the ACO's participating providers. The ACO REACH Professional track offers a Primary Care Capitation Payment, a risk-adjusted monthly payment covering all primary care services. In the Global track, providers can select from the Primary Care Capitation Payment or the Total Care Capitation Payment, a risk-adjusted monthly payment for all covered services, including specialty care.

Pros Cons Examples

Incentivizes efficient care

Encourages care coordination within the healthcare system and with community-based organizations

Encourages utilization of high-quality and low-cost providers and care delivery alternatives

Encourages care delivery alternatives that may be less costly and more convenient

Requires access and quality guardrails to ensure that care is not restricted

May encourage avoidance of high-risk patients

Accountable Care Organization Realizing Equity, Access, and Community Health (ACO REACH) Model

Total cost of care

A March 2022 environmental scan prepared for the Office of the Assistant Secretary for Planning and Evaluation (ASPE) explains that total cost of care (TCOC) broadly refers to all direct and indirect costs associated with healthcare services given over a specified period, though what is included in those direct and indirect costs may vary by program. However, this same report notes that there is not one comprehensive, widely accepted definition of total cost of care (TCOC) in healthcare delivery payment models.

In the Maryland Total Cost of Care Model, the Centers for Medicare & Medicaid Services (CMS) and the state of Maryland are partnering to set a per capita limit on Medicare total cost of care in Maryland. Building off the success of the Maryland All-Payer Model aimed at reducing hospital costs, the Maryland Total Cost of Care Model employs a wider range of providers to reduce Medicare spending across all services, not just hospital services. In this model, total cost of care is defined as “the aggregate Medicare [fee-for-service] costs for all items and services, or a specific subset thereof, [delivered] to Medicare FFS beneficiaries.” In addition to each participating hospital receiving a population-based payment to cover all hospital services provided during the year, this model also allows hospitals to make incentive payments to nonhospital providers.

Pros Cons Examples

Incentivizes efficient care

Encourages care coordination within healthcare system and with community-based organizations

Encourages utilization of high-quality and low-cost providers

Encourages care delivery alternatives that may be less costly and more convenient

Requires access and quality guardrails to ensure that care is not restricted

Maryland Total Cost of Care Model

What is unique about Medicaid payment systems? What challenges do rural providers face related to Medicaid reimbursement?

Similar to Medicare, Medicaid reimbursement is also a critical component of rural healthcare facilities' revenue. According to the National Center for Health Statistics Health, United States 2020-2021 (Table HIMcaid), 24.3% adults aged 18-64 in rural areas were covered by Medicaid in 2019. Medicaid is a federal-state partnership that extends across all 50 states, the District of Columbia, and the U.S. territories and commonwealths. As a result, there are 56 distinct plans with their own benefits and eligibility requirements. While there are core federal requirements regarding services that must be covered and who is eligible to participate, each state has the latitude to determine some aspects of the benefit packages, payment policies, and how and to what extent Medicaid is expanded to include people at income levels beyond the minimum required by the federal government. Given this variation, some rural providers may find that Medicaid policies bolster their financial situation, while providers in another state may not fare as well.

Because Medicaid is a key payer in many rural areas, changes at the federal or state level related to Medicaid eligibility or payment policies will affect many rural providers' finances. The April 2018 Medicaid and CHIP Payment and Access Commission (MACPAC) fact sheet Rural Hospitals and Medicaid Payment Policy notes how most state Medicaid programs use Critical Access Hospitals status to identify small rural hospitals to receive special reimbursement with the intent of helping those hospitals stay financially viable. According to Medicaid and Rural Health, an April 2021 issue brief from MACPAC, 15 states target Medicaid Disproportionate Share Hospital payments to rural hospitals and Critical Access Hospitals, and 9 states target upper payment limit (UPL) supplemental payments to these providers. Medicaid Base and Supplemental Payments to Hospitals provides a more detailed overview of how hospitals are paid by Medicaid.

The Effects of Medicaid Expansion under the ACA: Studies from January 2014 to January 2020 explains that studies show Medicaid expansion improved the financial performance of many hospitals, including rural hospitals. Varying Trends in the Financial Viability of US Rural Hospitals, 2011–17 explains that operating margins for CAHs in Medicaid expansion states improved between 2011-2017, while the margin dropped for both CAH and PPS hospitals in non-expansion states during this period. Similarly, costs of uncompensated care at rural hospitals fell 43% between 2013-2015 in states that implemented Medicaid expansion compared to 16% in states that did not expand Medicaid eligibility.

What other types of payments could rural providers receive?

Uncompensated Care Pool

Several states have implemented uncompensated care pools through Section 1115 Medicaid waivers. These uncompensated care pools, also called low-income pools, allow states to draw on Medicaid funds to support safety net providers and defray the costs of uncompensated care.

According to the American Hospital Association's Uncompensated Hospital Care Cost Fact Sheet, uncompensated care occurs when a hospital does not receive payment for services. Medicaid and Medicare calculate uncompensated care differently. According to the Medicaid and CHIP Payment and Access Commission (MACPAC), the Medicaid program considers the unpaid costs of care for uninsured individuals and the Medicaid shortfall the core components to uncompensated care. The unpaid costs of care include charity care and bad debt for individuals without insurance and excludes those costs for insured patients. The Medicaid shortfall is defined as “the difference between the Medicaid base payments a hospital receives and its costs of providing services to Medicaid-enrolled patients.”

In the Medicare program, bad debt is one component of uncompensated care in which a hospital expected, but did not receive, payment from patients or insurance. Charity care is another component of uncompensated care in which hospitals did not expect to receive payment. Hospitals typically have processes in place to identify patients who may need financial assistance.

Patient out-of-pocket payments

Several factors impact if, and how much, individuals pay for their healthcare. The cost-sharing liabilities assumed by privately insured individuals, such as copays or coinsurance, is a portion of the allowed rate by the provider and the insurance plan. Insurance plans often cover services like wellness visits or disease management program participation before patients pay the entire deductible, the amount individuals must pay before plans will pay for other services.

The uninsured are responsible for the full cost of their care. According to Geographic Variation in Health Insurance Coverage: United States, 2022, rural counties had the same percentage of uninsured adult residents as large central metropolitan counties (13.9%), but a higher percentage than large fringe metropolitan (10.1%) and medium and small metropolitan (12.2%) counties. However, hospitals can also identify patients for whom they will provide charity care, such as patients from whom they do not expect payment or patients requesting financial assistance. In addition, some providers will provide services on a sliding scale. Federally Qualified Health Centers, for example, are required to have a sliding fee discount program.

What is the reimbursement process for rural providers?

To be reimbursed for services, rural providers submit claims to the payer or payers for services provided to a specific patient. These claims provide information on the care provided. Certain provider types common in rural areas, such as Rural Health Clinics and Federally Qualified Health Centers, have specific, unique billing requirements and processes.

A typical reimbursement process for outpatient treatment might look something like this:

  • On arrival, the patient pays a copay for the visit, if that is required for their coverage and type of visit. The registration staff may also confirm health insurance information at this point, to ensure the correct payers are billed.
  • During the visit, the provider documents the services provided.
  • After the visit, a coding and billing specialist translates the provider's description of the visit into the standardized codes for the diagnosis and treatment provided. Depending on the payer, there may be negotiated rates the facility and payer have agreed upon. The coded visit information is transmitted, typically electronically, to the payer(s) covering the patient.
  • The payer then either pays the requested amount or denies the claim.
  • If denied, the billing/coding staff can adjust the claim and resubmit.
  • Eventually payment is received. The patient's remaining liability, after paying the copay, is then determined and billed accordingly.

Rural billing and coding staff need to stay current on requirements from the payers with which they work. For example, new rules took effect in January 2022 to protect individuals enrolled in group or individual health insurance plans from excessive out-of-pocket medical bills from emergency care, non-emergency care from out-of-network providers at in-network facilities, and air ambulance services. Ending Surprise Medical Bills offers resources for healthcare providers and consumers regarding surprise billing regulations and policies. In addition, coding correctly will result in the optimal reimbursement for a given procedure or diagnosis. If an incorrect procedure or diagnosis is selected, payment could be lower, or the claim may be rejected and must be resubmitted, delaying reimbursement. Since rural facilities and providers' offices are typically smaller than urban facilities, rural facilities may also have fewer staff to efficiently manage the billing workflow, delaying payment.

How does the transition to value-based care impact rural providers?

As the U.S. healthcare system continues to evolve from paying for services by volume to paying for value, rural providers face barriers to participating in these value-based payment systems unique from their urban counterparts. How to Design Value‐Based Care Models for Rural Participant Success: A Summit Findings Report, which summarizes a July 2020 summit of rural participants in value‐based care models and programs, outlines some of the challenges that rural providers experience in making the transition:

  • Structural and eligibility barriers
  • Difficulty shifting only part of care delivery and payment to be part of models
  • Low patient volumes that often do not generate adequate numbers for quality measurement and evaluation purposes
  • Inadequate financial stability and reserves required to assume additional financial risk

In addition, the November 2021 Government Accountability Office report Medicare: Information on the Transition to Alternative Payment Models by Providers in Rural, Health Professional Shortage, or Underserved Areas, highlights similar challenges to participating in Advanced Alternative Payment Models (APMs). Despite these challenges, rural providers are finding ways to participate in and succeed in this system-wide transition.

The Centers for Medicare & Medicaid Services (CMS) Innovation Center, which develops and tests new payment and service delivery models, has launched rural-specific and rural-relevant models and demonstrations. The Pennsylvania Rural Health Model, jointly administered with the Pennsylvania Department of Health, tests whether paying participating hospitals a prospectively set global budget can increase access to high-quality care in rural Pennsylvania, improve the financial viability of rural hospitals, and reduce the growth of hospital expenditures across payers. For more information on these and other emerging payment and service delivery models, see the Testing New Approaches section.

Where can I find resources that facilitate the transition to value-based care?

Rural Health Value, through funding from the Federal Office of Rural Health Policy, publishes free resources available to the public to help rural providers transition to a high-performance rural health system. Rural Health Value also offers the Value-Based Care Assessment Tool, which can help rural providers determine their readiness for value-based care based on an assessment of 80 care capacities. Catalog of Value-Based Initiatives for Rural Providers summarizes a variety of value-based programs from a rural provider perspective, with information on program purpose, eligibility, timeline, payment model, and rural participation in the program.

The Rural Hospital Toolkit for Transitioning to Value-based Systems from the National Rural Health Resource Center offers detailed guidance and strategies to help rural hospitals transition to a focus on population health.

The Centers for Medicare & Medicaid Services (CMS) also offers several resources that can facilitate the transition to value-based care. The Medicare Learning Network's MLN Matters articles provide an overview of Medicare coverage, billing, and payments for select value-based models. The CMS Innovation Center maintains a catalog of reports and evaluations on each model.

Who can I contact for information about billing and reimbursement questions?

CMS Regional Office Rural Health Coordinators – For technical, policy, and operational assistance of rural health issues.

Medicare Administrative Contractor (MAC) – for questions about Medicare claims, reimbursement, and billing issues, including Medicare Part A or Part B services.

Last Updated: 3/19/2024
Last Reviewed: 10/20/2022