Rural Hospital Relief Bill Waives 35-Mile Rule for 120 Financially Struggling Hospitals, Requires New Service Lines

The Rural Hospital Closure Relief Act of 2025 is a targeted bill aimed at throwing a lifeline to rural hospitals teetering on the brink of collapse. It creates a temporary, nine-year exception to a major Medicare rule that often prevents struggling facilities from accessing better funding. Specifically, it allows up to 120 financially distressed rural hospitals nationwide to qualify as Critical Access Hospitals (CAHs), even if they are located closer than the standard 35 miles to another hospital (SEC. 2).

To qualify for this new pathway, a hospital must meet several criteria, including being in a rural area, having two consecutive years of negative operating margins, and being located in an area with high poverty or a health professional shortage. Most importantly, the state must certify the hospital as a “necessary provider.” The catch? The hospital must submit a strategic plan and commit to opening or expanding a high-demand service line, such as obstetrics or behavioral health, which are often the first to go when budgets get tight (SEC. 2).

The Lifeline: How the CAH Exception Works

For regular people in rural communities, this bill is about keeping the lights on at their local ER. Critical Access Hospitals get cost-based reimbursement from Medicare, which is generally more favorable than the standard payment system. This is often the difference between staying open and closing down. Currently, if your local hospital is 20 miles from the next nearest one, it can’t be a CAH, even if that next hospital is too small or too specialized to handle everything your community needs. This bill temporarily fixes that for 120 facilities.

However, the relief is strictly capped: only 120 hospitals total can use this pathway, and no single state can certify more than five. This limitation means many struggling hospitals will be left out. The requirement to open a new service line, like a maternity ward or a mental health unit, is a big ask for a hospital that’s already been losing money for two years straight. While beneficial for the community—imagine having local access to prenatal care again—it’s a significant financial risk for the hospital (SEC. 2).

The Sunset Clause and Payment System Uncertainty

Here’s where the policy gets tricky. This new CAH designation is not permanent. The authority to certify hospitals under this pathway ends after nine years, and Section 5 mandates that all hospitals designated this way must transition to a new payment model within one year of that deadline. Essentially, the government is giving these hospitals a decade to stabilize and figure out their next move. They will be forced to switch to either a new model recommended by the Medicare Payment Advisory Commission (MedPAC), their old payment system, or become a Rural Emergency Hospital.

This creates a future uncertainty for these communities. While the bill aims to stabilize things now, it sets a ticking clock. If a hospital uses this time to build up a new service line, but the recommended new payment model doesn't cover their costs, they could be facing closure again in 10 years. To prepare for this transition, the bill requires MedPAC to study and report on long-term payment systems for rural hospitals by 2033 (SEC. 3).

Changes for U.S. Territories

In a separate, but important change, the bill adjusts the Critical Access Hospital rules for U.S. territories like Guam, American Samoa, and the Virgin Islands. In the 50 states, a CAH can have no more than 25 acute care inpatient beds. For the territories, the Secretary of Health and Human Services will now determine the appropriate bed limit (SEC. 4). This gives the Secretary flexibility to account for the unique healthcare needs and geography of these island communities, where 25 beds might be too restrictive.