Nearly 200 rural hospitals have closed nationally in the past 20 years, partly because of financial challenges. The Pennsylvania Rural Health Model (PARHM) aimed to reverse that trend. 

Under PARHM, federal funds supported predictable, predetermined revenues, in advance, for participating rural hospitals. PARHM was one of only a few programs in the U.S. to test whether this type of payment system could remove some of the financial uncertainty of fee-for-service payments that vary with demand.

But a rigorous financial evaluation of PARHM by LDI Senior Fellows Paula Chatterjee and Norma Coe, with LDI Executive Director Rachel M. Werner, found mixed results, which Chatterjee explained in the podcast A Health Podyssey. Supporting these hospitals may require more than payment reforms, the researchers said. To address the rural hospital challenge, they recommend broader, long-term investments in rural communities and policies addressing their clinical workforce shortages, rising chronic diseases, and declining populations.

The PARHM Plan

PARHM began in 2017, funded by $25 million from the Centers for Medicare & Medicaid Services (CMS) Innovation Center. To financially support hospitals, public and private insurers used historical revenue and health service records to determine annual, prospective payments (known as global budgets) to voluntarily participating hospitals. 

The budgets were coupled with hospital transformation plans. To improve health outcomes, hospitals got local input for plans designed to enhance care quality for their communities and reduce costs as required by the Innovation Center. From 2019 through 2024, the hospitals received prospective payments and developed and implemented these care redesign plans. 

The LDI study examined financial but not health outcomes. It used 2014–2023 data from CMS and other national sources, applying several analytic strategies to compare 17 participating hospitals with 40 nonparticipating hospitals in Pennsylvania and 160 rural hospitals in five border states. 

The methods accounted for differences in the number of hospital beds, membership in a health system, and Critical Access Hospital status—a Medicare reimbursement program that supports qualifying rural hospitals. The analyses considered the impact of COVID-19, but Chatterjee said the complexity of pandemic effects meant their influence could not be fully determined. 

Participating hospitals were generally smaller than nonparticipating hospitals and not part of health systems. They were more often Critical Access Hospitals and tended to start with lower operating and total margins than comparison hospitals.

Mixed Evidence of PARHM’s Impact

In the most promising results, during the first year of prospective payments, participating hospitals saw mean operating margins rise from -7.8% in 2018 to -1.9% in 2019, while margins declined for comparison hospitals. Over the study period, participating hospitals had an average improvement in total and operating margins of up to four to five percentage points compared to nonparticipating hospitals. 

Overall, however, the results were mixed. Hospitals’ financial strain (estimated as uncompensated care) and a measure of liquidity were essentially unchanged by PARHM across analyses, and the effects of PARHM on margins were not always statistically significant. Although not measured in the study, the program did not meet its required cost-saving targets, possibly because the state and insurers overestimated the annual hospital budgets.

Although PARHM has ended, Chatterjee said the study is still useful for policymakers and rural hospital leaders. Similar payment strategies are being tested elsewhere, and CMS plans to expand these types of programs. The CMS Advancing All-Payer Health Equity Approaches and Development (AHEAD) initiative includes global budgets for participating hospitals and aims to improve the health of participating states’ populations while lowering health care costs. 

Solving the Rural Hospital Closure Crisis

The results suggest that providing a reliable income may not be sufficient to overcome rural hospitals’ financial challenges, the researchers said. They are now studying the second goal of PARHM to see if the program improved health outcomes for rural communities.

Chatterjee and colleagues said addressing the rural hospital crisis will require more than stabilizing payments. They and others showed that local economic decline—including falling income and rising unemployment and bankruptcy rates—often precedes rural hospital closures. 

“We need to couple hospital payment policies with broader community investments to strengthen rural areas and economies,” Chatterjee said. “For many of these rural hospitals, payment policy alone is like using a bucket to empty the ocean.”

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The study, “Mixed Evidence That Rural Hospitals’ Finances Improved With Participation In The Pennsylvania Rural Health Model” was published July 7, 2025 in Health Affairs. Authors include Paula Chatterjee, Michael Wang, Xinwei Chen, Seiyoun Kim, Norma Coe, Karen E. Joynt Maddox, Karen Murphy, and Rachel M. Werner. 

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