Survival versus Scale: The Effects of Critical Access Hospital Designation

The Critical Access Hospital (CAH) program, established under the Balanced Budget Act of 1997, provides cost-based Medicare reimbursement to small rural hospitals in exchange for limits on inpatient capacity and service scope. We estimate the effects of CAH designation on hospital finances, capacity, and organizational outcomes using a synthetic difference-in-differences design that exploits the staggered 1999– 2002 rollout of state-level CAH availability. We find that CAH designation raises operating margins by three to four percentage points, with no change in liquidity or capital investment, as cost-based reimbursement sustains revenue while expenses fall with scale. Designation also reduces inpatient scale, with significant declines in total beds, obstetric capacity, and nursing staff. Emergency department visits also decline meaningfully, while outpatient volume is largely unchanged. At the same time, CAH designation reduces hospital closures, with no meaningful effect on mergers. These results point to a “survival versus scale” tradeoff across hospitals within a state, wherein designation-based subsidies avert closure for a small number of hospitals while inducing widespread inpatient downsizing among the many more hospitals that convert. Because converting hospitals shed more inpatient capacity than averted closures preserve, the program may reduce aggregate rural inpatient capacity even as it keeps hospitals open.