Rural Incentives Are Inefficient

Keith Rural Subsidies would be a more accurate name.

Keith Rural Subsidies would be a more accurate name.

Every country music fan and Sarah Palin supporter understands that real America lies thriving and vibrant somewhere between the immoral coastal cities and other places that with disproportionate shares of minorities. What is less known is how frequently Congress uses tax money to make the rural lifestyle more practical. For example, via Kaiser Health News, we see there’s plenty of support from a cadre of bi-partisan, “fiscally responsible” rural Senators to encourage significantly higher Medicare payment rates for rural hospitals that aren’t actually far from other medical institutions.

Congress created the “critical access hospital” category in 1997 to ensure access to care in isolated parts of the country. Under the law, hospitals that are at least 35 miles away from other health facilities can be deemed “critical access” hospitals; those hospitals can collect 101 percent of their costs from Medicare, for a maximum of 25 beds, rather than the usual 95 percent of allowable costs.

Growth in such hospitals exploded, and by 2006, there were 1,280 critical access facilities. And many of them won the designation despite being located within 35 miles of other medical facilities; state officials routinely waived the requirement with federal acquiescence.

The rapid growth slowed three years ago when Congress, worried about billions of dollars in added Medicare costs, eliminated states’ rights to waive the 35-mile rule. Since then, only a couple of dozen new critical access hospitals have been designated. The total is currently about 1,300.

Now lawmakers from rural states want to ease the rules, partly by making it easier for hospitals to qualify for “critical access” status even if they are less than 35 miles from another facility. Supporters note that the hospitals, besides providing emergency and limited inpatient treatment, are often the mainstays of small-town economies. “Hospital reimbursement systems that work well in larger cities do not necessarily work in rural towns, where people still need health care,” Pryor’s spokeswoman said, “but the same volume of patients is not present.”

The point here is that there are serious economic incentives to living in urban, more densely populated areas. One such benefit is close access to emergency medical care. I don’t posit that rural Americans should be condemned to die, but where you choose to live actually is a matter subject to at least some individual preference, and using Federal policy to tilt the scales in an inefficient, impractical, and anti-majoritarian direction really doesn’t seem like an appropriate use of  tax money. If people want to live in more remote urban areas, then that’s fine, but they should at least have to accept that there are significant trade offs to doing so (or maybe send us urban folks picking up the tab a thank you note or something).

Ending these sorts of policies, which build on a long tradition of funneling Federal money towards poor, rural states (whose politicians often bristle at the mere hint of Federal spending), would ultimately encourage more optimal use of resources while — wait for it — using the magical powers of the free market.

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2 Responses to “Rural Incentives Are Inefficient”

  1. RGM Says:

    As the Kaiser opinion notes, the Medicare/Medicaid funding that comes with the “critical care” status is more important to for-profit hospitals in rural areas which both have large uninsured populations and have large populations which (over) utilize hospital services. That’s a hefty set of three “ifs”. Conversely, also as the Kaiser opinion notes, most hospitals in Virginia, for example, care little about the designation.

    The good news is that Jefferson was correct: America can live without cities, but not rural areas. You can’t grow corn and raise cows (for example) in downtown DC, so somebody has to live in a rural area in order for any city to survive. There are dangers — starvation, for example — which result from assigning a too-low value to food producing rural areas. The true economics involve providing subsidies (rather than cash) for food-producing areas: breaking this model has devastating consequences for food costs in cities.

    Free market economy works; however, it doesn’t always work for the people who desire the most benefit for the least effort.

  2. Jon Says:

    RGM — I’m not exactly sure that Jefferson envisioned full scale globalization or technological advances in agriculture that allow large corporate to capitalize on economies of scale (corporations and large farms account for about 70 percent of food production). But that’s not really the point.

    I’m not suggesting wholesale abandonment of rural America. As you highlight in your comment, this is a policy that sends money to make rural life more convenient than it would be without subsidy. Indeed, the whole point — as you show — is that it’s mostly a waste of money, without which, people might be more drawn to less rural areas where medical care is more accessible.

    If that proves disastrous for food production, then it’s something worth looking in to, but it’s not clear why we need to continue wasteful programs that obscure the true costs associated with living arrangements.


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