The state of rural hospitals in 2025: In survival mode against a backdrop of rising expenses and political uncertainty
- Jordan Peterson
- 3 days ago
- 10 min read
For the better part of the last decade, rural hospitals have been running on thin ice. In 2025, that ice appears poised to splinter. Core stressors have been turbocharged, thanks not only to ongoing cost and reimbursement pressures, but also to a historic shift in federal priorities under the OBBBA (One Big Beautiful Bill Act). Margins that were razor-thin pre-COVID are now tipping into the red for almost half of facilities, with a sizable portion at imminent risk of closure. The potential ripple effects are wide: loss of emergency capacity, migration of labor and services out of communities, and economic destabilization in regions where hospitals are often the largest employers. In this blog post, we’ll break down the state of rural hospitals in 2025, going beyond the headline numbers. We’ll cover:
We’ll cover more about the current financial landscape for hospitals and health systems (including rural providers) in our upcoming Board Briefing. You can register for the webinar here or by clicking the below image.
The state of rural hospitals in 2025: Financial performance
Let’s start by making sure we’re on the same page with terminology. What is a rural hospital? “Rural hospital” is used broadly but specifically refers to facilities outside metropolitan areas. They tend to serve smaller, older, poorer, and less healthy populations with longer travel times for care. CMS offers the formal designation of either:
Critical Access Hospitals (CAHs): Hospitals in rural areas with fewer than 25 inpatient beds, 24/7 emergency care, and that are (generally) located more than 35 miles from the next hospital.
Rural Emergency Hospitals (REHs): A new (since 2023) category for hospitals in rural areas offering only outpatient and emergency functions in return for special federal payments. (We will cover REHs in more depth later in the post.)
Before we get into rural hospitals' 2025 financial performance, it’s helpful to understand the recent financial performance of all types of hospitals and health systems. A quick recap: We saw provider margins start to stabilize across 2024 before sliding once again in 2025.
At a high level, the 2024 stabilization was largely due to rebounding utilization, especially in the latter half of the year. Now, halfway into 2025, we’ve seen median margins dip again, mostly due to rising expenses (labor and non-labor), ongoing inflation, and regulatory/policy changes that are straining hospital finances despite ongoing volume gains.
Of course, even during the brief period of stabilization, plenty of provider organizations were still struggling financially. We’ve come to refer to that dynamic as margin divergence, or the variation in performance within the hospital sector (which has tended to widen over time). That dynamic is particularly evident when looking at rural hospitals. Rural hospitals have struggled financially for years but especially in the aftermath of the Covid-19 pandemic and as Medicaid payments have continuously fallen below the actual cost to provide health care (more on this later). On average, rural hospitals have narrower margins than urban hospitals—3.1% compared to 5.4%. And more rural hospitals are operating in the red compared to urban hospitals—44% compared to 35%.
There’s further variation within the rural category, with some subcategories more likely to struggle financially:
Rural hospitals in non-expansion states: Rural hospitals in Medicaid expansion states have generally performed better (at least financially) than those in non-expansion states. A KFF analysis from 2019 shows that rural hospitals in expansion states had median operating margins of 2%, compared to just 0.3% in non-expansion states. This disparity is largely driven by lower uncompensated care costs in expansion states.
Non-affiliated rural hospitals: Affiliated rural hospitals generally have (slightly) stronger financial performance compared to non-affiliated (independent) rural hospitals. A 2019 Health Affairs study showed that health system affiliation was associated with improved financial performance for rural hospitals, due to operational efficiencies, improved revenue cycle management, and access to capital, all of which help stabilize finances. (The same study also found that affiliation could also sometimes reduce local access to certain services as hospitals may consolidate or eliminate less profitable offerings.)
Why do rural hospitals struggle?
Rural hospitals tend to struggle financially due to several interconnected forces. There are the universal challenges all hospitals face, such as rising labor and supply costs (which tend to hit rural hospitals even harder because it’s difficult to recruit and retain workers in rural areas), ongoing inflation, etc. But they also face unique challenges, including:
Lower patient volumes, especially in specialized services. Rural residents are more likely to require complex care because they tend to be older, sicker, and poorer than their urban peers. At the same time, rural areas tend to have fewer providers, meaning residents have to travel longer distances and have less access to certain health care services. This is trending in the wrong direction: there will be a projected 23% decline in rural physicians by 2030 due to an aging workforce—more than half of rural doctors are aged 50 or older. Rural areas are also, by definition, more geographically dispersed, leading to lower patient volume in rural hospitals, which limits revenue and raises the per-patient cost (because of fixed costs like building maintenance and staffing). On top of that, workforce shortages make it difficult for rural hospitals to attract and retain specialized providers, restricting their ability to offer high-demand, higher-reimbursed specialized services that would otherwise boost revenue (more on this later).
Heavier reliance on Medicare and Medicaid, which reimburse at lower rates than private insurers. Medicaid and Medicare cover a combined 72% of discharges in rural areas (compared to 66% in urban areas). And rural areas have a higher percentage of Medicaid patients: about a quarter of adults in rural areas are covered by Medicaid. This translates to a financial reliance on Medicaid: roughly 10% of rural hospitals’ revenue comes from Medicaid reimbursements. Given their already tight operating margins, any cutbacks in Medicaid funding could severely impact rural hospital finances. (We’ll cover how the Medicaid cuts in OBBBA will impact rural providers.)
Accelerated rate of rural closures
Rural hospitals have been dealing with these challenges for years, and they can ultimately culminate in closures: From 2005 to 2025, 196 rural hospitals closed as rural hospitals struggled to recover from the 2008 recession (which increased the uninsured rate) and in the aftermath of Covid (rural hospitals struggled to obtain federal funds that helped keep other facilities afloat). And closures outpace openings. From 2017 to 2023, 61 hospitals closed compared to only 11 that opened, a net reduction of 50 hospitals. We expect this trend to continue, especially in the wake of OBBBA (more on this in the next section).
In addition to closing altogether, rural hospitals have also dropped certain service lines over time: more than 60% of Healthcare Professional Shortage Areas (HPSAs) are in rural areas—limiting the types of services rural hospitals are able to provide. A common service line that is cut first in rural areas due to low volumes and financial instability is maternity care. One Chartis report revealed that, between 2011 and 2023, 293 rural hospitals stopped providing obstetrics (OB) services, representing 24% of the nation’s rural OB units.
Rural hospital and service line closures often raise concerns about access to care, health disparities, and community financial stability, especially if there are few or no other hospitals to provide care. For example, some downstream impacts of hospital closures include:
Reduced access to care: Patients must travel further for care (or forgo it altogether).
Worsened geographic health disparities: Patients experience health care deserts, leading to fragmented and delayed care (i.e. worse outcomes).
Economic decline of communities: Downstream impacts such as increased unemployment, lower income levels, and slower economic growth (especially since hospitals are often the largest employer in communities).
A possible saving grace? The Rural Emergency Hospital (REH) designation
In response to growing concerns about rural hospital closures, CMS established a new hospital type effective January 1, 2023: the Rural Emergency Hospital (REH). The goal of the new designation is to preserve access to emergency care and avoid closures in rural areas. When an eligible facility converts to an REH, it receives increased reimbursement for eligible services, but it must close inpatient services and provide exclusively emergency department services, observation care, and select outpatient services.
While this designation gives rural hospitals an option other than closing, there are some drawbacks, including:
Limited access to care: Rural areas still lose key service lines (i.e. inpatient services). Because fewer services are offered, access to care is negatively impacted, but, of course, an REH designation still results in more services than would a hospital closure.
Strict eligibility requirements: Only hospitals designated as Critical Access Hospitals (CAHs) or a rural Prospective Payment System (PPS) hospital with no more than 50 beds as of December 2020 are eligible, meaning this isn’t an option for every rural hospital at risk of closing.
Loss of inpatient revenue: While hospitals receive a fixed monthly payment (about $276,000 monthy in 2024) and enhanced Medicare reimbursement for outpatient services, they must give up inpatient services—which are typically their most profitable. It’s a different calculation for every hospital. Some may benefit from the financial relief, especially if they were already struggling with inpatient operations. But many rural hospitals may continue to forgo REH status because they can’t afford to lose their inpatient revenue.
There’s been relatively low uptake: In 2023, an estimated 1,500 hospitals were eligible for REH designation, but as of July 2, 2025 only 41 rural hospitals had converted to REH status. The low uptake can be attributed to the three drawbacks we just covered.
The One Big Beautiful Bill Act (OBBBA) is a big headwind for rural hospitals
Rural hospitals are in a precarious position with looming cuts to Medicaid through the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025. OBBBA introduced deep Medicaid cuts (over $1 trillion over the next decade), including adding 80-hour a month Medicaid work requirements and restrictions on states’ ability to raise funds for Medicaid through provider taxes. (We covered the details and the impacts of the bill in a recent blog post, which you can read here.)
The CBO projects that the bill will result in up to 10 million people losing coverage nationwide, rolling back roughly a third of the gains from the ACA. The uninsured spike will hit rural and Medicaid-expansion states hardest, and safety-net providers will absorb the first wave of uncompensated care increases. In June, the AHA released a fact sheet estimating that key Medicaid provisions in OBBBA would result in a $50.4 billion reduction in federal Medicaid spending on rural hospitals over 10 years and 1.8 million individuals in rural communities losing their Medicaid coverage by 2034. (Note: this analysis was done prior to the Senate’s version of the bill—the version that was ultimately passed and included even more Medicaid cuts.)
Estimates indicate that OBBBA could put hundreds more rural hospitals at risk of closing over the next several years. According to an analysis by the Cecil G. Sheps Center at the University of North Carolina at Chapel Hill, which tracks rural hospital closures, more than 300 hospitals could be at risk for closure.
(Another) possible saving grace? The Rural Health Transformation Fund
The Senate added a $50 billion fund to the OBBBA after some GOP senators expressed concern over how the Medicaid Restrictions could impact rural hospitals. States have until the end of the year to apply for funds. Half of the funding will be distributed among all states with approved applications, while the other half will be allocated entirely at the discretion of the CMS Administrator, Mehmet Oz. But there is still a lot of concern that the fund won’t offset the full impacts of the bill’s other changes because:
The fund only covers a fraction of the cuts: There’s an estimated $137 billion in cuts to Medicaid spending in rural areas as a result of the bill (this includes the Medicaid cuts, limits on provider taxes, and fewer insured patients).
There's no guarantee that rural hospitals will win the funds: There’s nothing in the bill guaranteeing that every state that applies will get money (or how much money) or that the money will go to rural areas. And we know that smaller hospitals have historically struggled to successfully access federal funds such as these because they require a lot of administrative support.
The application process is confusing and on a short timeline: Hospitals need to apply to these funds by December, giving them 5 months to get everything together. And by December, we will only find out where the funding is going for the next five years, which is pretty short-term in the grand scheme of things. Now, almost two months after the bill was signed, it’s clear that there’s still confusion around who will get these funds/how the funds will be distributed (e.g., some states thought the money would be divided equally among all 50 states, which turned out NOT to be true).
Parting thoughts: What to watch for
The outlook for rural providers is undeniably challenging—financial headwinds, workforce shortages, and uneven policy support will continue to challenge rural hospitals. But it’s also true that rural hospitals have a long history of adapting to challenges. We’ll continue to watch for early signals to see how rural hospitals respond to their current environment. Here are some things we're keeping an eye on:
Short-term signals directly from hospitals themselves: If conditions are as dire as they appear, we may start to see even more announcements of service line closures, inpatient reductions, outright closures, or an uptick in consolidation with larger systems.
Tweaks to OBBBA (especially provisions with delayed start dates): Despite the huge estimated impacts of the bill, it will be years before many of these changes—including some of the most notable Medicaid provisions—go into effect. The staged implementation is widely viewed as a political strategy (one that both parties have deployed in the past) to reduce the most visible coverage losses and disruptions until after the 2026 midterm elections. In the meantime, patient advocates and provider groups will likely press Congress to further delay the provisions or stop them altogether. For rural hospitals, the delayed start also means that they have some time to prepare for the expected cuts.
Additional targeted policy actions: While neither the REH designation nor the Rural Health Transformation Fund will be sufficient on their own (and have their limitations), they do represent a clear acknowledgment by policymakers that rural hospitals need targeted support. There is at least some political momentum to try to support rural hospitals, and momentum here matters, because the funding gaps remain significant. We will continue to watch the impacts as more hospitals get the REH designation and/or as the Transformation Funds are distributed.
Want more on this topic? Join our Board Briefing this week to go deeper the economic, policy, and demographic factors influencing hospital finances. You can register for the webinar here.