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.
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