There is a hospital in Midtown Manhattan — one of the most expensive pieces of real estate on earth, home to some of the most sophisticated medical care in the world — that the federal government officially classifies as a rural provider.
That is not a clerical error. It is not an oversight. It is the result of a deliberate designation under Medicare rules that New York Presbyterian has pursued and maintained, entitling it to financial benefits that Congress designed to keep struggling hospitals in places like rural North Carolina, rural Alabama, and rural Iowa alive.
When Ways and Means Committee members pressed New York Presbyterian's CEO, Dr. Brian Donnelly, to explain how a hospital in Manhattan qualifies as rural, his answer was straightforward: the hospital meets CMS's definition of a "rural referral center" based on patient complexity and referral patterns.
"There are zero farms in Midtown Manhattan," Chairman Jason Smith noted during the exchange. "No crops are growing on East 68th Street."
This is the story of how America's largest hospital systems have learned to play both sides of a fundamental divide — and why patients in truly rural communities are paying the price.
Dr. Michael Waldrum, the CEO of ECU Health in eastern North Carolina, came to the committee with a different kind of testimony. He did not represent a sprawling urban academic center. He represents a nine-hospital system serving 1.4 million people spread across a region roughly the size of Maryland — a region that, if it were its own state, would rank among the poorest and sickest in the country.
ECU Health grew not through aggressive acquisition for profit, but through something closer to necessity. Eight of the rural hospitals now in the system came to ECU because they were failing — running years of deficits, losing physicians, facing closure. In Martin County, about 45 miles north of Greenville, a for-profit hospital gave up and closed, leaving the community as one of the largest healthcare deserts in the country.
Dr. Waldrum was blunt about what this means in practice: "When the only hospital within 60 miles closes, care doesn't become cheaper. It becomes unavailable."
That is the reality of rural healthcare in America. Not a policy abstraction. Not a talking point. A lived experience for tens of millions of Americans who drive more than an hour for basic care, who give birth in hospitals that deliver one or two babies a day because there is no alternative, and who watch their communities hollow out as medical infrastructure follows economic opportunity to urban centers.
Against that backdrop, the behavior of large urban systems in capturing rural benefits is not just a financial irregularity. It is a transfer of resources from communities in crisis to institutions that are, by any reasonable measure, doing fine.
The mechanics of the loophole are worth understanding, because they reveal how a rule designed to serve a legitimate purpose can be systematically exploited when the financial incentives are large enough.
Under Medicare rules, hospitals that qualify as rural referral centers — based on criteria including patient volume, case mix complexity, and referral patterns from rural providers — are eligible for a range of financial benefits. These include higher reimbursement rates under certain payment programs, easier access to 340B drug pricing discounts, and priority access to federally funded graduate medical education slots.
When Congress created the rural residency program in 2020, setting aside 10 percent of new residency slots for rural hospitals, the intent was explicit: help rural communities that struggle to attract and retain physicians by giving them a pipeline of locally trained doctors.
The result was almost the opposite. Of 120 slots allocated to rural hospitals, only 30 went to truly rural communities. Urban hospitals captured 97 percent of the new slots — far exceeding what Congress ever intended.
The rural classification itself has metastasized. Three hospitals carried rural referral center designations in 2017. By 2023, that number had grown to 425 — a 14,000 percent increase in six years.
This did not happen because America suddenly developed 422 new rural hospitals. It happened because large systems recognized the financial value of the designation and pursued it.
The rural loophole is one mechanism by which hospital consolidation raises costs for patients. But it operates alongside an equally consequential one that affects patients in cities, suburbs, and rural areas alike: the facility fee.
Here is how it works. When a hospital acquires an independent physician practice, that practice can be reclassified as a hospital outpatient department. Once that happens, the same doctor, performing the same procedure, in the same building, for the same patient, can bill at hospital outpatient rates rather than physician office rates.
Those rates are not similar. They are dramatically different.
Chairman Smith walked through the numbers during the hearing. An ultrasound performed by a physician in their own office costs Medicare approximately $164. The same ultrasound at a hospital outpatient department costs $339 — more than double. A biopsy runs about $150 in a physician's office and $800 in a hospital outpatient setting. An epidural injection: $250 in a physician's office, $740 in a hospital outpatient department.
The patient sees the same doctor. The procedure is the same. The building may be literally unchanged. But the bill is two to five times higher, simply because ownership changed.
For a senior on Medicare paying 20 percent coinsurance, that difference is not abstract. It is the difference between a $20 copay and a $50 copay for a routine visit. Across dozens of appointments over the course of a year, it adds up to hundreds or thousands of dollars that a person on a fixed income did not budget for and cannot easily absorb.
During the hearing, committee members asked the hospital executives a pointed show-of-hands question: raise your hand if your hospital makes more revenue from a service than the independent physician down the street makes for the same service.
Every hand went up.
When asked whether they would support legislation equalizing those payments at the physician rate — what policymakers call "site neutrality" — no hands went up.
Understanding why hospitals behave this way requires understanding the financial logic that drives their decisions.
Half of all U.S. physicians are now employed by hospital systems or health systems — up from roughly a quarter a decade ago. That consolidation did not happen primarily because patients demanded it or because it consistently produced better care. Study after study has found that hospital mergers are not generally associated with improved health outcomes.
It happened because the reimbursement structure of American healthcare rewards it. When a hospital acquires a physician practice and reclassifies it as an outpatient department, revenue increases — often dramatically — without a corresponding improvement in the care delivered. The acquisition pays for itself, and then some, on the backs of patients and insurers who pay the inflated facility fees.
The same logic applies to rural classification. When a large system can capture rural designation for an urban campus, it unlocks reimbursement advantages and program eligibilities that improve the bottom line. The administrative cost of pursuing the designation is trivial compared to the financial return.
This is not a story about bad people making evil decisions. It is a story about a payment system that has created powerful incentives for behavior that serves institutional balance sheets rather than patient welfare — and about what happens when sophisticated organizations optimize aggressively for those incentives over many years.
The committee hearing surfaced several specific reforms that have bipartisan support in principle, even if advancing them has proven difficult in practice.
Site neutrality — requiring that Medicare pay the same rate for the same service regardless of whether it is delivered in a hospital-owned facility or an independent physician's office — has been included in the budget proposals of presidents from both parties. The Congressional Budget Office estimates it could save the federal government more than $160 billion and reduce costs for Medicare beneficiaries by tens of billions more. It has yet to pass, because hospital systems lobby against it ferociously every time it comes up for a vote.
Closing the rural reclassification loophole is another priority with real momentum. Representatives Carol Miller and Glenn Thompson have introduced the Defend Rural Health Act specifically to close the dual-classification loophole that allows urban hospitals to collect rural benefits. The committee's exchange with New York Presbyterian's CEO gave the issue a face and a concrete example.
On 340B, meaningful reform would require demonstrated patient benefit as a condition of program participation — not just administrative compliance with eligibility rules. Hospitals that capture 340B discounts but cannot show those discounts benefiting low-income patients should not continue receiving them.
None of these reforms are easy. All of them will face well-funded opposition from hospital systems that have built substantial revenue streams around the current rules. The question is whether the political will exists to push through the resistance.
If you have ever gone to your regular doctor, only to receive a bill with an unfamiliar "facility fee" you did not expect — this is why.
If you have ever tried to find an independent specialist and discovered that nearly every option in your area is now part of a large hospital system — this is why.
If you live in a rural community that has watched its local hospital close or cut services, while reading about large academic medical centers in major cities capturing rural program benefits — this is why.
The consolidation of American healthcare into large systems is not inevitable. It is the product of specific policy choices that have created specific financial incentives. Those policy choices can be changed. The incentives can be restructured. The loopholes can be closed.
But that only happens if patients understand what is happening and demand it.
The Ways and Means Committee's hearing this week was an important step. The testimony was candid in ways that committee hearings often are not. The frustration from members on both sides of the aisle was genuine. The evidence presented — the 14,000 percent increase in rural designations, the facility fee disparities, the 340B numbers — was documented and damning.
The next step is converting that documented frustration into legislation that actually changes the calculus for large hospital systems. And for that, patients need to be loud.
READ ON: And if you want to see how these same dynamics are playing out in one of the largest federal drug programs in the country, read: Hearing Bombshell: Hospitals Pocketed $290B in Drug Discounts.
Contact your representative and ask them to support site-neutrality legislation and closure of the rural hospital reclassification loophole. Your voice — especially if you live in a rural community that has experienced healthcare service cuts — carries real weight in this debate.
Share your experience with facility fees, rural hospital closures, or unexpected billing after a practice was acquired by a hospital system. We are building a record of patient impact to support reform advocates on Capitol Hill.
Follow @PatientsRising for continued coverage of Congress's healthcare affordability investigation.