Converting to critical access status: how does it affect rural hospitals' financial performance?

To improve rural access to care, the Balanced Budget Act of 1997 allowed eligible rural hospitals to convert to critical access hospitals (CAHs), which changed their Medicare payment from a prospective payment system (PPS) to a cost-based system. The objective of this paper is to examine the effects of CAH conversion on rural hospital operating revenues, operating expenses, and operating margins using an eight-year panel of 89 rural hospitals in Iowa. Ad hoc hospital revenue, cost, and profit functions were estimated using panel data fixed-effects linear models. We found that rural hospital CAH conversion was associated with significant increases in hospital operating revenues, expenses, and margins.